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Europe — European recovery prompts EU to upwardly revise GDP forecast

07 May 2010

The Spring Forecast 2010 published by the Commission of the European Union (EU), confirms that the economic recovery is in progress in the EU. After having experienced the deepest recession in its history, the EU economy is set to grow by +1% in 2010 and +1.75% in 2011. This implies an upward revision of +0.25 of a percentage point for this year from the Commission's autumn forecast, as the EU countries benefit from a stronger external environment.

Nevertheless, weak domestic demand continues to restrain the recovery further out. The forecast speed of recovery varies across Member States, reflecting their individual circumstances and the policies they pursue.

Labour market conditions have shown some signs of stabilisation recently, with the unemployment rate projected to peak this year at a lower level than forecast earlier, yet at close to 10% in the EU.

The temporary fiscal measures put in place have been key in turning the EU economy around, but also added to the public deficit, which is set to rise to 7.25% of GDP in 2010, before falling back slightly in 2011.

EU Commissioner for Economic and Monetary Affairs, Olli Rehn, said "the improved outlook for economic growth this year is good news for Europe. We must now ensure that growth will not be derailed by risks related to financial stability. Sustainable growth calls for determined fiscal consolidation efforts and reforms that enhance productivity and employment."

Although substantial, the impact of the economic crisis on the EU labour market seems somewhat smaller than initially expected. This is explained by the use of short-term measures and labour hoarding in some Member States, but is also a result of past reforms. Signs of stabilisation have recently begun to emerge and the outlook is now somewhat improved compared to the autumn forecast.

Nevertheless, reflecting the usual lag between developments in the real economy and the labour market, employment is still expected to contract by some 1% this year and begin to increase only in the course of 2011. Unemployment rate is projected to stabilise at close to 10%, or half a percentage point lower than projected last autumn, in the EU, though the situation differs markedly across Member States.

Notwithstanding apparent signs of stabilisation, the labour‑market situation is projected to remain weak. Developments on this front will be of key importance to the recovery process in the EU and could be a potential source of both downside and upside risks, depending also on the effectiveness of policy measures.

On the other hand, the rebound in emerging markets and the resulting recovery of trade could boost the EU economy further, beyond what is currently expected. The recent upsurge in confidence (especially in manufacturing) points to some upside risks in the near term. A successful completion of the financial support to Greece can be expected to increase investor and consumer confidence. Risks to the inflation outlook are also broadly balanced.

To read the full European Economic Forecast – Spring 2010 please click here



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