Eurozone at a Turning Point
September 21st, 2009
The euro zone is emerging from recession, the European Commission said on Monday, but kept a gloomy overall forecast for 2009 as data showed job losses across the region still rising and sapping growth.
In its interim forecast, the European Union’s executive said the euro zone economy would contract by 4.0 percent this year — the same as it forecast in May — but would expand in both the third and fourth quarters.
Economists share this view, especially after the release of July industrial production in the euro zone which showed the pace of the decline in factories’ output falling from previous months, though it was still 15.9 percent year-on-year.
“The growth momentum … has therefore been revised up for the second half of this year. However, the outcome at the turn of the year proved so weak that, despite the new outlook and the better-than-expected outcome for the second quarter, the fall in GDP remains unchanged,” the Commission said.
“The EU economy appears to be at a turning point,” it said.
European Central Bank Governing Council Member Nout Wellink cautioned that the global economic recovery will probably be very slow and there was a risk of a relapse into recession.
The Commission said the better outlook for the second half of 2009 could mean the euro zone would growth 0.4 percent in 2010, rather than contract by 0.1 percent as forecast in May.
But EU Monetary Affairs Commissioner Joaquin Almunia noted the outlook was mainly due to “unprecedented” amounts of money pumped into the economy by central banks and governments — a factor that would diminish over time.
“A lasting and sustainable recovery might need more time to materialise,” the Commission said.
Noting a 0.5 percent fall in the number of people with jobs in the euro zone in the second quarter, Almunia also expressed worries about further job losses. “The impact of this crisis on the labour market has a lag of two to three quarters,” he said.
Economists remained cautious about the numbers for that reason, and noted output was still falling month-on-month.
“The further decline in euro zone industrial output in July shows that while the wider economy has probably returned to positive growth in Q3, the recovery will not be particularly strong,” said Ben May from Capital Economics.
France and Germany surprised by emerging from recession last quarter, but there is doubt over whether this was just the result of a huge rise in public sector demand that will eventually have to be cut to get budgets back under control.
Almunia said the total discretionary fiscal stimulus in the EU was higher than previously expected at 1.4 percent of EU GDP in 2009 and 1.1 percent in 2010. The previous estimate for the total for two years was 1.8 percent.
Almunia said the stimulus should be kept in 2009 and 2010, but once the recovery takes firmly hold, the stimulus should be gradually withdrawn in line with plans that should be drafted already now and that should be coordinated between countries.
“If these kinds of decisions are not coordinated, it can create tensions, can create financial protectionism, can create problems and barriers in our internal market and can be more inefficient,” Almunia told a news conference.
The interim forecasts are for the biggest economies in the 27-nation EU — Germany, France, Italy, Spain, the Netherlands, Britain and Poland, which together account for 80 percent of the bloc’s gross domestic product.
The Commission said the German economy, the euro zone’s biggest, would shrink 5.1 percent this year, less than the 5.4 percent forecast in May. In France, growth should be -2.1 percent, compared with -3.0 percent predicted in May.
Poland, which is not part of the euro zone, would be one of the few European countries to see economy growth in 2009, by 1.0 percent compared to a previous forecast of a 1.4 percent fall.
Spain, Italy, Britain and the Netherlands would all contract more than previously thought, although the UK economy would return to growth in the third quarter. Spain’s recession – largely due to the decline of the Spanish property market – is set to extend well into 2010.
Euro zone inflation in 2009 will be 0.4 percent, the Commission said, sticking by its May forecast. This is well below the ECB’s target of below, but close to, 2 percent.
The Commission said that while inflation risks were broadly balanced, the risk of deflation has diminished because of a rise in commodity prices.
The ECB earlier this month forecast a smaller contraction for the euro zone and higher inflation.
“We consider that risks for this inflation forecast are balanced and we don’t perceive significant inflation or deflation risks,” Almunia told a news conference.
“This shows evolution of inflation that would remain, probably also across 2010, below the ECB objective.”
Story from NY Times
What do the two Edwards think?
Edward Harrison asks the question: If a boom Is coming, will a bust follow?
Edward Hugh looks at the latest data and suggests that Spain has a long, hard road ahead
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