European Commission expects GDP to shrink by 1.8 per cent in 2009

GDP growth in the European Union is expected to shrink by almost 1.8 per cent for the first time in 2009 before recovering moderately by only 0.5 per cent in 2010. Inflation will be 1 per cent in 2009, below the European Central Bank target, the European Commission said in an interim forecast.

Downgrading of the GDP was ''a result of the impact on the real economy of the intensified financial crisis, the ensuing global downturn manifested in the severe contraction of world trade and manufacturing output and, in some countries, housing-market corrections,'' it said in a statement.

The current European Commission's interim forecast is a dramatic downward revision from previous EU estimates. The commission's November forecast estimated the euro-zone economy growth's of 0.1 per cent.

The commission hopes the ''measures to stabilise the financial market, the easing of monetary policies and the economic recovery plans'' will enable it "to create the conditions for a gradual recovery in the second part of 2009" said Joaquín Almunia, The EU economic commissioner.

The commission's top priority is to'' to improve the flows of credit at reasonable prices and to implement the fiscal stimulus packages quickly to stimulate investment and private consumption'' said Economic Commissioner Joaquin Almunia in a statement.

In order to boost confidence of member states, the commission expects commitment ''to reverse the deterioration of public finances'' to ensure ''the medium-to-long term sustainability of public finances" said Almunia.

EU economy - continue to fall
According to commission's data, GDP fell by 0.2 per cent in both the euro area and the EU, in the third quarter of 2008 indicating that '' the euro area entered its first technical recession as GDP contracted for the second consecutive quarter ''.

The commission's survey data across sectors and countries indicate "the outlook is for a continued fall in GDP throughout the first half of this year" and marked slump and deterioration in other leading indicators during the fourth quarter, the statement said.

The GDP growth is expected to have a significant impact due to '' the fall in both private and net foreign demand with only government consumption and public investment providing relief '', the commission said.

The commission noted that ''last year private investment was a key driving force in the upturn, is facing an abrupt slowdown on the back of a substantial drop in capacity utilisation rates, the deterioration in the economic outlook and tighter financing conditions''.

The commission said however, that EU countries should make clear that they would shore up public finances once the recession is over.

The European Union executive arm said that of the 16 euro zone member states, seven would have budget shortfalls greater than 3 per cent of GDP in 2009.

Unemployment and deficits to rise further
According to the statement the labour market situation started to worsen in most member states in 2008 and forecasts '' the employment growth is expected to turn negative this year, with EU employment falling by 3.5 million jobs''.

The commission expects the unemployment rate to increase in 2009 to 8.25 per cent in the EU and 9.25 per cent in the euro area.

The commission forecast an annual average unemployment rate of 9.5 per cent in the EU and 10.25 per cent in the euro area by 2010, up from 7.5 per cent in 2008, the first time unemployment rate will surpass 10 percent since 1998.

The worsened outlook according to the commission is also expected '' to take a toll on public finances, which will suffer from the reversal of past revenue windfalls ''.

At the time this forecast was finalized, the commission expects '' the impact of important discretionary measures adopted and/or announced by member states amount to some 1 per cent of GDP for 2009 in the EU''.

The headline deficit is expected to more than double this year in the EU to 4.5 per cent in 2009 from some 1¾ per cent to 4 per cent in the euro area, the statement said.
Inflation set to fall rapidly

Inflationary pressures abated rapidly after a fierce upsurge in commodity prices that drove inflation to a peak in the summer of 2008.

Euro-area inflation fell sharply in the second half of 2008, from a peak of 4 per cent in July to 1.6 per cent in December. The sharp fall in oil and other commodity prices amid the worsening global growth outlook has been the main driver of the reduction in headline inflation.

The commission expects ''a significant downward revision to the inflation outlook compared to the autumn projection''.
 
Consumer-price inflation is expected to fall from 3.7 per cent in 2008 in the EU (3.3 per cent in the euro area) to 1.2 per cent in 2009 (1.0 per cent in the euro area) and just below 2 per cent in 2010 in both regions, the statement said.

The European Central Bank aims to keep inflation low and on four occasions since October 2008 has cut interest rates by a total of 225 basis points to 2.00 per cent, its lowest level since December 2005, as the deepening recession pressed policy makers into action.(See: European Central Bank cuts key rate by 50 bps to 2.00 per cent)

Global economy in recession this year
According to the EU's advanced interim forecast, the economic growth is expected to drop to about 1 per cent in 2008 in both the EU and the euro area, from just below 3 per cent in 2007.

Eeconomic activity worldwide is expected to have fallen markedly in the last quarter of 2008. The recent survey data indicate that this weakness is likely to persist in the short term.

It also forecast the economic downturn to be broad-based with negative spillovers increasingly affecting emerging-market economies.

In the second half of 2009, ''global growth is expected to rise gradually but moderately as the financial market situation improves'' and '' the impact of the macroeconomic policy easing (not least in the US) gains traction'' said the statement.

It forecast an overall global GDP growth to be around 2.75 per cent in 2010.

The euro zone government debt is expected to increase to 72.7 per cent of GDP in 2009 from 68.7 per cent in 2008 and jump further to 75.8 per cent in 2010.

The total fiscal stimulus measures adopted or announced by the member states in response to the economic downturn amounts to a total of more than € 130 billion in 2009, around 1 percent of EU GDP and in the euro area around € 100 billion (1 per cent of GDP).

Moreover, several European countries have already taken measures amounting to more than €60 billion in the EU (0.5 per cent of GDP) that would take effect in 2010.

Substantial uncertainties at the current juncture
The commission said that '' this forecast is again surrounded by exceptional uncertainty as the world economy faces its worst crisis since World War II.''

The commission said the risks to the growth outlook are balanced, however the impact of the financial crisis (including on the housing sector) and the severity of the negative feedback loop between the financial and real sectors of the economy need to be seen.

While on the other hand, growth could be stronger than expected if inter alia the fiscal packages restore confidence among investors and consumers more swiftly than assumed.

Risks to the inflation outlook also appear balanced, following developments in commodity prices and the deterioration of economic prospects globally.

The commission usually publishes economic forecasts four times a year but due to the countries reeling under global recession, the current interim forecast has been expanded. The next full-fledged forecast will come out on 4 May 2009.

Europe's largest economy, Germany became the latest country to unveil an economic stimulus package of about 50bn euros ($67bn; £45bn).