By Fernando Álvarez: Ex IMF Economist
According to a new Report published on November 10 by the EU, the recovery of the EU economy has stopped. Sharply deteriorated confidence is affecting investment and consumption, weakening global growth is holding back exports, and urgent fiscal consolidation is weighing on domestic demand. GDP in the EU is now projected to stagnate until well into 2012. Growth for the whole of 2012 is forecast at about ½%.
By 2013, a return to slow growth of about 1½% is expected. No real improvements are projected for labour markets, and unemployment is forecast to remain at the current high level of around 9½%. Inflation is set to return below 2% over the coming quarters. Fiscal consolidation is forecast to progress with public deficits set to decline to just above 3% by 2013 under an assumption of unchanged policies.
Commission Vice-President for Economic and Monetary Affairs of the EU, Olli Rehn said on November 10: "Growth has stalled in Europe, and there is a risk of a new recession. While jobs are increasing in some member states, no real improvement is forecast in the unemployment situation in the EU as a whole. The key for the resumption of growth and job creation is restoring confidence in fiscal sustainability and in the financial system and speeding up reforms to enhance Europe's growth potential. There is a broad consensus on the necessary policy action. What we need now is unwavering implementation. On my part, I will start using the new rules of economic governance from Day one."
The economic recovery has come to a standstill. A stagnation of GDP is now expected in the current and coming quarters. Since the summer, the outlook has taken a turn for the worse. The sovereign-debt crisis in euro-area Member States has spread, debt sustainability in advanced economies outside the EU has also moved into investors' focus, and the global economy has lost steam. Firms are expected to postpone or cancel investment as the growth outlook has darkened amid increased uncertainty.
Households are projected to consume prudently, while in some Member States also continuing to work down high levels of debt. Moreover, banks are likely to restrict lending, thereby further curtailing the prospects for investment and consumption. Fiscal consolidation has become more urgent as concerns about sustainability have become more acute and spread to hitherto unaffected countries. The weakening real economy, fragile public finances and the vulnerable financial sector appear to be mutually affecting each other in a vicious circle. Confidence and growth will only return once this negative interaction is interrupted.
In combination, the policy measures decided over the past months are expected to be effective in reducing the uncertainty related to the sovereign-debt and financial-market crisis towards mid-2012, and this will gradually release deferred investment and consumption. Annual GDP growth in 2012 is forecast at 0.6% in the EU and 0.5% in the euro area. Growth in 2013 is expected to remain lackluster at 1.5% in the EU and 1.3% in the euro area. No group of Member States will escape the expected slowdown, but growth differences will persist.
