The European Commission’s forecast for 2008-2010 predicts economic growth will come to standstill
Joaquín Almunia, Economic and Monetary Affairs Commissioner, had a sombre prediction for the European economy.
“The economic horizon has now significantly darkened as the European Union economy is hit by the financial crisis that deepened during the autumn and is taking a toll on business and consumer confidence.”
Ponderous words, no doubt. The Commission’s economic forecast is projecting EU economic growth to drop sharply to 1.4% in 2008. It was 2.9% in 2007. In 2009 the EU economy is expected to grind to a standstill at 0.2%, before recovering to 1.1% in 2010. It’s bleak all round.
More positively, inflationary pressures are diminishing as oil prices fall, and the risks of second-round effects fade away. After reaching the best position since 2000, the overall budgetary position is also set to deteriorate while the rescue packages could raise public debt.
This is the result of the financial crisis along with the ongoing correction in house prices in many economies and lagged effects from high commodity prices. During 2010, growth is expected to rise gradually as financial markets stabilise, thereby supporting confidence and trade.
The outlook remains clouded by considerable uncertainty about who will ultimately bear the brunt of the credit losses and what the scale of the loss will be. Credit conditions have tightened significantly and, recent recapitalisation notwithstanding, the banking sector is expected to continue to deleverage, putting a brake on lending.
Bleak outlook for the EU
Against such an external background and following a further deterioration in survey and hard data in recent months, GDP is now expected to have declined in the third quarter of 2008 in both the EU and the euro area. And the outlook remains bleak further ahead, with several of the EU economies in or close to a recession.
Investment, which was a key driving force in the previous upturn, faces a particularly abrupt slowdown.
Consumption is set to stay subdued in these uncertain times even though real disposable income growth is set to rebound as the inflationary impact of higher commodity prices fades.
Net exports are projected to contribute positively to GDP as imports are set to slow more than exports, partly benefiting from the recent depreciation of the euro real effective exchange rates.
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