EU raises 2010 growth forecast to 0.7pc
Tuesday November 03 2009
The euro-area economy may expand 0.7pc next year, the European Commission said, raising its growth forecast even as budget deficits and jobless ranks swell further.
The economy of the 16 countries sharing the euro will resume growth in 2010 and expand 1.5pc in 2011, after contracting 4pc this year, the Brussels-based commission, the European Union’s executive, said today in its semi-annual economic forecasts.
It previously forecast a 0.1pc contraction in 2010. The region’s average budget deficit will swell to 6.9pc of gross domestic product next year and slip to 6.5pc in 2011 and unemployment will rise into 2011, reaching 10.9pc, the highest since at least 1995.
European companies from STMicroelectronics NV to Pernod Ricard SA cited signs of recovery as they reported earnings in the past month, suggesting that record-low interest rates and government stimulus measures are feeding into the broader economy.
Even as consumer confidence improves, soaring budget deficits and unemployment rates threaten to undermine the recovery from the worst recession in six decades.
“While the recession may be over, the impact of the crisis is not,” the commission said in the report. For a “solid, sustainable” recovery, “it will be key to tackle the labour market and debt challenges.”
The commission’s growth forecasts are more optimistic than predictions from the International Monetary Fund on October 1 that the region will grow 0.3pc next year after a 4.2pc contraction in 2009. The IMF forecast an unemployment rate of 11.7pc for next year.
Six months
The euro, which has strengthened 10pc against the dollar in the past six months, traded at 1.4739, down 0.2pc from yesterday before the report.
Inflation next year will remain below the 2pc ceiling set by the European Central Bank, the commission said, with annual price declines projected in Ireland in 2010. The euro area inflation rate will be 0.3pc this year, rising to 1.1pc next year and 1.5pc in 2011, it said.
The Frankfurt-based ECB, which aims to keep inflation just below 2pc, expects annual price growth to average about 0.4pc this year and 1.2pc in 2010.
ECB President Jean-Claude Trichet said on October 8 that inflation would turn positive again “in the coming months” and inflation expectations are “anchored.”
The ECB, which holds its next rate meeting in two days, is expected to keep its benchmark interest rate at a record low of 1pc until the third quarter of next year, according to the median forecast from a Bloomberg survey.
‘More and more’
Trichet said on October 15 that there are “more and more signs of stabilisation in the euro area,” even as it is “premature to declare the financial crisis to be over.”
ECB council member Mario Draghi issued a warning about the sustainability of the recovery on October 29, saying it may be based only on extraordinary stimulus measures and fade once those supports are removed.
Also threatening the recovery are surging budget deficits and rising unemployment. Deficits next year will amount to 14.7pc in Ireland, 10.1pc in Spain, 8.2pc in France and 5pc in Germany, the commission said today. All euro region countries will breach the EU’s 3pc limit in 2010 and 2011, it said.
Increasing unemployment will stretch deficits, as joblessness is projected to rise to 10.7pc next year and 10.9pc in 2011.
Metro AG, Germany’s largest retailer, said today that third-quarter profit plunged 61pc as rising joblessness eroded consumer spending across Europe. The company forecast no improvement for the rest of the year.
While unemployment has more than doubled in two years in Spain, countries including Germany and the Netherlands have held down job losses with government incentives.
“These schemes are softening the pain,” said Martin van Vliet, senior economist at ING Bank in Amsterdam.
“In the longer term, if unemployment remains relatively low compared to the pain in the economy, the flip side is that the odds of a jobless recovery in the euro zone are much higher than in the US.”
- Emma Ross-Thomas
© Bloomberg
