Global growth slows sharply – EU Autumn Forecasts

05 Nov '08

6 min read

Bleak outlook for the EU
Against such an external background and following a further deterioration in survey and hard data in recent months, GDP is now expected to have declined in the third quarter of 2008 in both the EU and the euro area. And the outlook remains bleak further ahead, with several of the EU economies in or close to a recession.

Investment, which was a key driving force in the previous upturn, faces a particularly abrupt slowdown, reflecting the impact of multiple shocks: a weakening demand and a marked drop in investor confidence, tighter financing conditions and a reduction in credit availability.

Consumption is set to stay subdued in these uncertain times even though real disposable income growth is set to rebound as the inflationary impact of higher commodity prices fades.

Net exports are projected to contribute positively to GDP as imports are set to slow more than exports, partly benefiting from the recent depreciation of the euro real effective exchange rates.

Labour market and public finances hit hard
Employment is expected to increase by about ¼ million jobs in the EU and ½ million in the euro area in 2009-2010, markedly less than the 6 million jobs created in 2007-2008 in the EU (4 million of which were in the euro area). As a result, the unemployment rate is expected to increase by about 1 pp. in the coming two years. This would correspond to an unemployment rate of 7.8% in the EU and 8.4% in the euro area in 2009, with a further increase in 2010.

The worsened outlook is expected to take a toll also on public finances, with the deficit in the general government balances increasing from less than 1% of GDP in 2007 in the EU to 1.6% in 2008, 2.3% in 2009 and 2.6% in 2010, the latter based on the usual no-policy-change assumption. For the euro area, the deficit is expected to rise to 1.3% this year, 1.8% in 2009 and 2% in 2010. Most countries will be affected although with significant differences. Uncertainties over the fiscal implications of the financial rescue packages also cloud the fiscal outlook.

Inflation set to fall rapidly - On a more positive note, inflation is expected to have peaked and to fall rapidly to below 2½% in 2009 and 2¼% in 2010 in the EU (2.2% and 2.1%, respectively, for the euro area). This still includes a slight upward revision from the spring projection, reflecting the surge in commodity prices during the summer. However, the recent strong decline in commodity prices, together with a marked weakening of the growth outlook and a related easing of the labour-market situation, reduces markedly the risk of second-round effects.

Downside risks prevail - This forecast is surrounded by considerable uncertainty and downside risks. The financial stress could still intensify, last longer or have a more pronounced impact on the real economy, fuelling the negative feedback loop. This would, in turn, reinforce the ongoing correction of some housing markets, putting balance sheets under strain, which could both hamper the necessary deleveraging process in the financial sector and, via negative wealth and confidence effects, reduce private consumption. Future commodity prices, on the other hand, are more likely to fall than increase as growth prospects deteriorate. This would ease inflationary pressures and make risks for inflation more balanced.

European Union

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