ECONOMIC GROWTH across the EU will have slowed to a “virtual standstill” by the end of the year but a recession should be avoided, according to the European Commission.
Sharply revising down growth forecasts for the 27-country region, the Brussels executive warned yesterday that prospects had been hit by financial market turmoil, fiscal austerity, tumbling business and consumer confidence and weaker global demand.
However, even the latest gloomy forecast depended “crucially” on politicians being able to stop the euro zone debt crisis increasing banking sector fragility and further hitting growth. Fiscal austerity measures in the EU and beyond could also “weigh more on domestic demand than currently envisaged”, it warned.
“The outlook for the European economy has deteriorated,” EU economic and monetary affairs commissioner Olli Rehn said in a statement. “The sovereign-debt crisis has worsened, and the financial market turmoil is set to dampen the real economy.”
Mr Rehn said Ireland’s growth prospects are “broadly in line” with expectations.
The commission cut substantially its forecast for UK economic growth this year – to 1.1 per cent from the 1.7 per cent it had expected in May.
The growth outlook for Germany, Europe’s biggest economy, was lowered to 0.4 per cent for the third quarter and 0.2 per cent for the fourth, down from 0.5 per cent for each quarter earlier. It forecast no growth for Italy in the second half.
The forecast for EU growth in 2011 – at 1.7 per cent – was only slightly lower than the 1.8 per cent expected previously. But growth in the first half of the year had been stronger than expected and projected growth rates for the third and fourth quarter were revised down considerably.
The EU economy was expected to expand by just 0.2 per cent in both quarters; growth in the 17-country euro zone would be weaker still.
Nevertheless, the forecasts suggested the EU and euro zone would avoid recession this year – with recession defined as two consecutive quarters of economic contraction. The deeper-than-expected soft patch would see growth “coming to a virtual standstill towards the end of the year . . . but will not result in a double dip”, the commission concluded.
“The recovery lost steam in the US, and indicators for world trade suggest a further weakening into the third quarter,” the commission said in the report.
“Global output is now projected to grow by some 4 per cent in 2011, a downward revision of about a half a percentage point compared to the spring forecast.”
Separately, the European Central Bank also said a euro zone recession “appears rather unlikely”. It blamed much of the euro zone growth slowdown on “spillover effects from developments in the global economy”.
Forward-looking indicators of growth remained “consistent with continued modest growth”, the ECB’s latest monthly bulletin concluded.
Both the commission and ECB warned that risks to growth forecasts were on the “downside”.
A gloomier outlook was seen by Now-Casting, a web-based forecasting group. Its figures showed euro zone gross domestic product expanding just 0.1 per cent in the third quarter – but contracting 0.2 per cent in the final three months. – (Copyright The Financial Times Limited 2011)
