In the European Commission's spring forecast, launched earlier this week, GDP in the European Union is projected to fall by four per cent this year and to broadly stabilise in 2010.
The main factors behind the recession are the worsening of the global financial crisis, a sharp contraction in world trade and ongoing housing market corrections in some economies. However, with the impact of fiscal and monetary stimulus measures kicking in, growth is expected to regain some momentum in the course of 2010, according to the Commission.
Labour markets will be severely affected, with the unemployment rate expected to increase to 11 per cent in the EU in 2010. The public deficit is also projected to rise sharply, to 7.25 per cent of GDP in 2010, reflecting both the slowdown and the discretionary measures taken to support the economy, in line with the European Recovery Plan proposed by the Commission.
"The European economy is in the midst of its deepest and most widespread recession in the post-war era. But the ambitious measures taken by governments and central banks in these exceptional circumstances are expected to put a floor under the fall in economic activity this year and enable a recovery next year. For this to happen we need to proceed rapidly with the cleaning up of the 'impaired assets' on bank balance sheets and recapitalise banks when appropriate," European Commissioner for Economic and Monetary Affairs Joaquín Almunia said.
As fiscal and monetary stimulus measures gain traction and the financial crisis gradually fizzles out, global GDP growth is forecast to turn positive again in the second half of 2009. In 2010, global growth is expected to reach two per cent, the Commission said.
The Commission said that employment is expected to contract by about 2.5 per cent in both the EU and the eurozone this year and by a further 1.5 per cent in 2010, resulting in about 8.5 million job losses for the two years, in contrast to the net job creation of 9.5 million during 2006-08.
Public finances are also being hit hard by the recession, with the budget deficit set to more than double this year in the EU (from 2.3 per cent of GDP in 2008 to six per cent) and to increase further in 2010 (to 7.25 per cent).
The sharp deterioration in the overall fiscal position is in part due to the economic slowdown itself, as automatic stabilisers are relatively large in Europe, but it also reflects the sizeable discretionary budgetary stimulus to support economic activity. Inflation has fallen sharply in recent months and is projected to continue to do so during the second and third quarter of this year, due to further base effects, a weak economic outlook and an assumed decline in commodity prices.
Overall, HICP inflation is projected to be slightly lower than one per cent in the EU (and 0.5 per cent in the eurozone) in 2009, and to reach a trough in the third quarter in both regions. As base effects of past hikes in energy and food prices drop out of the annual rate this autumn, HICP inflation is expected to gradually pick up to about 1.25 per cent next year, the Commission said.
The Commission said that real GDP is expected to contract by 0.9 per cent in Malta in 2009 and to return to positive territory by 2010. HCIP inflation is forecast to ease to one per cent this year after reaching 4.7 per cent in 2008 and the general government deficit is projected to decline to 3.5 per cent in 2009 from 4.7 per cent in 2008. The Commission said that employment in Malta is set to contract by 0.5 per cent this year and to grow in 2010.