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The EU economy spring 2013 forecast

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Following the recession that marked 2012, the EU economy is expected to stabilise in the first half of 2013. GDP growth is projected to turn positive gradually in the second half of the year before gaining some traction in 2014. As domestic demand is still constrained by a number of impediments that are typical of the aftermath of deep financial crises, external demand is set to be the main growth driver this year. The headwinds on private consumption and investment are expected to abate gradually, making way for a modest domestically sustained recovery next year. This forecast remains based on the assumption that continued policy implementation will prevent a renewed intensification of the sovereign-debt crisis.

Annual GDP growth this year is now forecast at -0.1% in the EU and at -0.4% in the euro area. For 2014, economic activity is projected to expand by 1.4% in the EU and 1.2 % in the euro area.

Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro said: “In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe. The EU’s policy mix is focused on sustainable growth and job creation. Fiscal consolidation is continuing, but its pace is slowing down. In parallel, structural reforms must be intensified to unlock growth in Europe.”

Drags on domestic demand are easing slowly

At present, domestic investment and consumption are still being held back by balance-sheet adjustment and credit supply constraints in some countries, low expectations about future profits and income, as well as high uncertainty about the economic outlook. While the financial market situation has improved significantly and for the EU as a whole interest rates have declined, this has not yet fed through to the real economy. There are so far only timid signs of easing financial fragmentation across Member States, and enterprises in vulnerable economies continue to face tight credit conditions.

The adjustment of external and internal imbalances is making progress, and a number of vulnerable Member States are expected to register current-account surpluses this year amid improved profitability of the export sector. However, even though debt deleveraging is progressing, it is likely to remain a burden on growth over the forecast horizon. Moreover, the weak labour-market situation is expected to weigh on private consumption. On balance, domestic demand growth is therefore forecast to remain modest over the forecast horizon.

The recovery of economic activity is expected to be too slow to reduce joblessness. Unemployment is forecast to reach 11% in the EU and 12% in the euro area in 2013 and to stabilise at these levels in 2014, while differences across Member States are expected to remain very large. Employment is projected to fall further in 2013 as the lagged impact of the 2012 recession continues to be felt. By 2014, however, more dynamic GDP growth is expected to start lifting employment.

Consumer-price inflation has continued to slow down in recent quarters, as the impact of past energy-price increases on inflation has been fading. The gradual decline of inflation is expected to continue this year, and it is now projected at 1.8% in the EU and 1.6% in the euro area in 2013, stabilising at 1.7% and 1.5%, respectively, in 2014.

spring 2013: Structural fiscal consolidation progressing more gradually

The reduction in general government deficits is set to continue. Headline fiscal deficits are projected to fall to 3.4% in the EU and 2.9% in the euro area in 2013. The pace of consolidation in terms of structural budget balances is expected to be slower than in 2012. In light of the weak outlook for economic activity, debt-to-GDP ratios are forecast to reach 89.8% this year in the EU and 95.5% in the euro area.

While the risks to the economic outlook have become more balanced on the back of important policy decisions since last summer, downside risks remain predominant. Very high levels of unemployment in some Member States could affect social cohesion and become persistent if further reforms are not undertaken. More generally, the effective implementation of adjustment measures and policies to strengthen the EMU architecture remains crucial to prevent a return of stress in financial markets. On the upside, the overall benign financial-market situation or faster-than-expected progress with adjustment and reforms could allow for a swifter return of confidence and advance the recovery. Global growth could prove more dynamic than expected, e.g. due to recent expansionary measures. Risks to the inflation outlook continue to be broadly balanced.

Source: European Commission

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