The EU economy is set to further consolidate its gradual recovery, with prospects for 2011 looking slightly better than projected in the autumn, according to the European Commission’s Spring Forecast 2011-12.
GDP is projected to grow by around 1.75 per cent this year and by close to two per cent in 2012. “This outlook is supported by better prospects for the global economy and overall upbeat EU business sentiment,” the Commission said.
Inflation, however, is rising faster, reflecting the increase in commodity prices. Headline inflation is projected to average almost three per cent in the EU and 2.5 per cent in the eurozone this year, before easing to about two per cent and 1.75 per cent respectively in 2012. Meanwhile, labour-market conditions are expected to slowly improve over the forecast horizon.
The unemployment rate is projected to fall by 0.5 per cent to a little over nine per cent and to 9.75 per cent in the EU and the euro area by 2012. Fiscal consolidation is progressing, with the public deficit set to decline to about 3.75 per cent of GDP by 2012. The prospects continue to vary considerably for individual member states, however.
European Commissioner for Economic and Monetary Affairs Olli Rehn said: “The main message in our forecast is that the economic recovery in Europe is solid and continues, despite recent external turbulence and tensions in the sovereign debt market. Public deficits are clearly declining. It is now essential to strengthen these trends of growth and consolidation and also ensure that they translate into more and better jobs. This calls for continued fiscal consolidation and determined implementation of structural reforms that help job creation and improve the competitiveness of our economies.”
The Spring Forecast points out that economic recovery in the EU continues to make headway, despite lingering vulnerabilities in financial markets and an external environment that has become more challenging. The recovery is broadening out and is projected to continue to do so in 2011 by and large as envisaged last autumn.
“As it is typically the case with recoveries from deep financial crises, the EU’s recovery is expected to be more muted than in previous upturns, though as private domestic demand gradually strengthens, the recovery will become increasingly self-sustaining.
“In terms of annual averages, GDP growth is expected to edge up from just above 1.5 per cent in the euro area and 1.75 per cent in the EU this year to around two per cent in both regions in 2012. The 2011 figures are slightly higher than expected in the previous comprehensive forecast of last autumn,” the report said.
The aggregate picture masks marked differences in developments across member states. Some countries, in particular Germany, but also some smaller export-oriented economies, have registered a solid rebound in activity, while others, notably some peripheral countries, are lagging behind. It is expected that the pace of recovery within the EU will continue to vary.
“The ongoing correction of intra-EU imbalances is set to continue over the forecast horizon. The adjustment is most marked in countries where deficits were very large at the onset of the crisis, to a large extent owed to a retrenchment in consumption. But also some structurally high current-account surpluses appear gradually to be coming down in view of stronger domestic demand and dynamic imports,” it said.
The Spring Forecast says the situation in European labour markets continues to be diverse, with the rate of unemployment ranging from four to five per cent in the Netherlands and Austria to 17 to 21 per cent in Spain and the Baltic States. Employment in the EU increased slightly in the last quarter of 2010, driven by improvements in all sectors, except industry and construction.
“Taking into account the usual lag between output and employment growth, employment is projected to improve modestly in both regions this year. The outlook for unemployment is for a decline of some 0.50 per cent over the forecast horizon in both regions.
However, despite brightening somewhat since the autumn, the outlook remains for a rather jobless recovery,” it says.
The report says that public finances begun to improve last year. On account of stronger growth and the end of the temporary stimulus measures, the general government deficit in the EU is projected to fall from about 6.5 per cent of GDP in 2010 to around 4.75 per cent in 2011 and 3.75 per cent in 2012, with a broadly similar pattern but at a somewhat lower level for the eurozone.
This is slightly more favourable than envisaged in the autumn. Spending cuts form the bulk of the adjustment in both regions. The debt ratio, in contrast, remains on an increasing path over the forecast horizon, reaching some 83 per cent of GDP in the EU and 88 per cent in the eurozone by 2012.
Relatively high consumer-price inflation is on the cards in both the EU and the eurozone over the coming period, though far lower than during the 2008 spike. Induced mainly by higher energy inflation, inflation is projected to average almost three per cent in the EU and 2.5 per cent in the eurozone this year, before easing to about two per cent and 1.75 per cent respectively in 2012.
“The still sizeable slack in the economy is expected to keep both wage growth and underlying inflation in check, partly offsetting expected increases in energy and commodity prices,” it says.
The forecast says that political changes in the Middle East and North Africa and the economic fallout of the earthquake and tsunami in Japan have heightened uncertainty and constitute downside risks to global economic activity, with the potential to lead to globally higher inflation and lower growth than incorporated in the baseline.
“Financial markets, particularly some sovereign-bond segments, remain fragile, and damaging negative feedback loops cannot be totally excluded. Risks from tensions in exchange–rate markets are also present,” the report points out.
The forecast says that stronger than assumed global growth, as a result of stronger domestic demand in emerging markets, could further benefit EU export growth. Domestically, the rebalancing of EU GDP growth towards domestic demand could prove stronger than assumed in the forecast with, for instance, the labour market surprising positively. There could also be greater than expected spillovers from the strong momentum in Germany to other member states.
“All in all, the balance of risks for the economic growth outlook presented in this forecast is clearly tilted to the downside,” the report says.
Moderate economic growth forecast for Malta
The European Commission has forecast a GDP growth for Malta of two per cent in 2011 and 2.2 per cent in 2012. It said investment is again expected to contribute strongly to overall growth this year supported by a significant expansion in public investment.
The Commission predicted a continued growth in employment and the exports of goods and services. It forecast that Malta will be able to reduce the deficit to three per cent of GDP (from 3.6 per cent in 2010) by the end of this year. Debt levels are expected to remain unchanged. However, the Commission said the upcoming Air Malta restructuring may give rise to additional government expenditure, thereby entailing upward risks for both the deficit and debt projections.
It said inflation in Malta is expected to remain higher than the eurozone’s average, reaching 2.7 per cent this year and falling to 2.2 per cent in 2012.