11 May 2012

European Commisson: Spring forecast 2012-13 - Towards a slow recovery

Following the output contraction in late 2011, the EU economy is estimated to be currently in a mild recession. Together with an expected acceleration in global growth, the recovery is forecast to set in slowly from the second half of the year on. The picture presented in the interim forecast in February is broadly confirmed for 2012, with real GDP projected to stagnate in the EU and to contract by -0.3 per cent in the euro area. For 2013, growth is forecast at 1.3 per cent in the EU and 1.0 per cent in the euro area. Unemployment is expected to remain high at 10 per cent in the EU and 11 per cent in the euro area over the forecast period. Inflation is set to moderate gradually as the impact of higher oil prices and tax increases fades away. Fiscal consolidation is forecast to progress, with public deficits in 2013 declining to 3.3 per cent in the EU and just below 3 per cent in the euro area. The economic situation differs considerably across Member States, also in view of the ongoing adjustment to the large disparities in external positions and structural conditions that have come to the fore over the last years.

Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro said: "A recovery is in sight, but the economic situation remains fragile, with still large disparities across Member States. We are witnessing an ongoing adjustment of the fiscal and structural imbalances built up before and after the onset of the crisis, made worse by the still weak economic sentiment Without further determined action, however, low growth in the EU could remain. Sound public finances are the condition for lasting growth, and building on the new strong framework for economic governance, we must support the adjustment by accelerating stability and growth-enhancing policies."

Subdued recovery later this year

Economic activity in the EU contracted in the last quarter of 2011 and is estimated also to have done so in the first quarter of 2012. A gradual recovery is forecast to start in the second half of the year and gather speed in 2013. It is nonetheless expected to remain subdued as several factors continue to weigh on domestic demand. The necessary efforts of banks to improve their balance sheets further will keep credit conditions tight, though credit demand overall also remains weak so far. Private consumption will be dampened by high unemployment, slow wage growth and inflation as well as high household debt in a number of Member States. Finally, private investment is currently still contracting, but should over the forecast horizon start to benefit from the expected return of confidence, low interest rates and solid global output growth. The positive contribution of net exports is the main expected driver of GDP growth in 2012. Gradually firming domestic demand is however expected to take over in 2013. This projection is based on the assumption that confidence will strengthen over time, as the challenges raised by the crisis are successfully addressed, including through the strong implementation of the agreed determined policy actions.

Public finances improving

Notwithstanding the output slowdown in the course of 2011, public finances in the EU improved significantly in 2011. On the back of already decided consolidation combined with a gradual economic recovery later over the forecast horizon, budget deficits are expected to continue declining from 4.5 per cent of GDP in the EU (4.1 per cent in the euro area) in 2011 to 3.6 per cent in the EU (3.2 per cent euro area) in 2012 and further to 3.3 per cent (2.9 per cent) in 2013, with large differences among Member States. However, the assumption of unchanged policies implies that for the EU almost no structural improvement could be included in the forecast for 2013. The increase of debt-to-GDP ratios is forecast to slow down and to reach 87.2 per cent of GDP in the EU (92.6 per cent in the euro area) by 2013.

Energy prices and indirect tax increases have been the main drivers of consumer price inflation in recent quarters, while underlying domestic price pressures were held back by the economic slowdown. Over the forecast horizon, inflation is forecast to moderate gradually, and fall back to below 1.8 per cent in 2013.

As in February, downside risks to the GDP forecast continue to prevail. The main risk remains an aggravation of the sovereign debt crisis with financial contagion and a sharp drop in credit availability. Another prominent downside risk stems from geopolitical uncertainty that could lead to a surge in oil prices. On the upside, a faster return of confidence could lead to an earlier and less subdued recovery. Moreover, the global economy could prove more dynamic than currently projected.

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