Following the output contraction in late 2011, the EU economy is estimated to be currently in a mild recession. While uncertainty about economic and financial prospects remains high, strong policy actions and major advancements in the EU institutional framework have brought about an easing of financial market tensions in the beginning of 2012 and a tentative stabilisation of confidence, expected to further strengthen over the forecast period. 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% in the euro area. For 2013, growth is forecast at 1.3% in the EU and 1.0% in the euro area. Unemployment is expected to remain high at 10% in the EU and 11% 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% in the EU and just below 3% 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 to have also 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 further improve their balance sheets 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.
Overall, the picture for 2012 from the February interim forecast is broadly confirmed. Annual GDP growth this year is forecast to be flat (0.0%) in the EU and -0.3% in the euro area. For 2013, modest growth of 1.3% in the EU and 1% in the euro area is projected. While the slowdown has affected all Member States, growth differentials are expected to persist, underpinned by different structural adjustment needs, financing costs and public finances sustainability. The adjustment of external imbalances at the Member State level is on-going and expected to proceed further over the forecast period.
In line with the slowdown in economic activity, employment is projected to contract by 0.2% in the EU (0.5% in the euro area) in 2012. The expected return of growth should lead to a gradual improvement of labour markets in 2013, which will in turn contribute to a more sustained recovery. Unemployment is expected to remain at a level of 10.3% in the EU over the forecast horizon and 11% in 2013 the euro area.
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% of GDP in the EU (4.1% in the euro area) in 2011 to 3.6% in the EU (3.2% euro area) in 2012 and further to 3.3% (2.9%) 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% of GDP in the EU (92.6% 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% 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.
Risks to the inflation outlook are broadly balanced.
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