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Autumn forecast 2011-13: Growth at a standstill

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Commission Vice-President for Economic and Monetary Affairs Olli Rehn said: "Growth has stalled in Europe, and there is a risk of a new recession. While jobs are increasing in some member states, no real improvement is forecast in the unemployment situation in the EU as a whole. The key for the resumption of growth and job creation is restoring confidence in fiscal sustainability and in the financial system and speeding up reforms to enhance Europe's growth potential. There is a broad consensus on the necessary policy action. What we need now is unwavering implementation. On my part, I will start using the new rules of economic governance from Day one."


Economic growth has stalled

The economic recovery has come to a standstill. A stagnation of GDP is now expected in the current and coming quarters. Since the summer, the outlook has taken a turn for the worse. The sovereign-debt crisis in euro-area Member States has spread, debt sustainability in advanced economies outside the EU has also moved into investors' focus, and the global economy has lost steam. Firms are expected to postpone or cancel investment as the growth outlook has darkened amid increased uncertainty. Households are projected to consume prudently, while in some Member States also continuing to work down high levels of debt. Moreover, banks are likely to restrict lending, thereby further curtailing the prospects for investment and consumption. Fiscal consolidation has become more urgent as concerns about sustainability have become more acute and spread to hitherto unaffected countries. The weakening real economy, fragile public finances and the vulnerable financial sector appear to be mutually affecting each other in a vicious circle. Confidence and growth will only return once this negative interaction is interrupted.

In combination, the policy measures decided over the past months are expected to be effective in reducing the uncertainty related to the sovereign-debt and financial-market crisis towards mid-2012, and this will gradually release deferred investment and consumption. Annual GDP growth in 2012 is forecast at 0.6% in the EU and 0.5% in the euro area. Growth in 2013 is expected to remain lacklustre at 1.5% in the EU and 1.3% in the euro area. No group of Member States will escape the expected slowdown, but growth differences will persist.

Growth not sufficient for labour market improvements

Employment growth is expected to grind to a halt in 2012. The expected pick-up of GDP growth starting in the second half of next year is too moderate to produce any strong labour market performance. Unemployment is not expected to fall over the forecast horizon. The situation of Member States' labour markets continues to differ substantially.

Public finances continue to gradually improve

2011 marks the change form stabilisation to consolidation of public finances. Fiscal deficit outcomes for 2011 are now projected at 4.7% of GDP in the EU and 4.1% in the euro area. For 2012, deficits are projected at 3.9% in the EU and 3.4% in the euro area. Further consolidation measures that are likely but not yet enacted are disregarded in this forecast. This technical assumption of unchanged policies might have a larger bearing on this forecast than usual. On this assumption, the aggregate debt-to-GDP ratio is expected to peak in the EU at about 85 % in 2012, and to stabilise in 2013. In the euro area the debt ratio is projected to continue to increase slightly over the forecast horizon breaching 90 % in 2012.

Abating inflation

Energy prices have been the main driver of inflation in 2011. As they are projected to gradually decrease, headline inflation is expected to fall back below 2% in 2012. Persistent slack in the economy will continue to hold back underlying price pressures, while wages are expected to grow only moderately.

Risks to the outlook strongly tilted to the downside

In view of the frail GDP growth expected under the baseline scenario, the risk of a recession is not negligible. The main downside risks stem from sovereign debt worries, the financial industry and world trade. There is a potential for negative dynamic interactions: Slower growth affects the sovereign debtors, whose weakness weighs on the health of the financial industry.

On the upside, confidence might return faster than currently assumed, releasing the potential for an earlier-than-expected recovery of investment and private consumption. Global growth could prove more resilient than projected in the baseline scenario and provide support to EU net exports. Finally, a larger decline in commodity prices could enhance real incomes and consumption.

Risks to the inflation outlook appear broadly balanced.

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