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Global growth slows sharply – EU Autumn Forecasts

05
Nov '08
European Union economic growth should be 1.4% in 2008, half what it was in 2007, and drop even more sharply in 2009 to 0.2% before recovering gradually to 1.1% in 2010 (1.2%, 0.1% and 0.9%, respectively, for the euro area). The Commission's autumn forecasts show that the EU economies are strongly affected by the financial crisis, which is aggravating housing-market correction in several economies at a time when external demand is fading rapidly.

While the important measures taken to stabilise financial markets have begun to restore confidence, the situation remains precarious and the risks to the forecasts significant. As a result, employment is set to increase only marginally in 2009-2010, after the 6 million new jobs created in 2007-2008, and unemployment is expected to rise by about 1 pp. over the forecast period after being at its lowest for more than a decade. More positively, inflationary pressures are diminishing as oil prices fall, and the risks of second-round effects fade away. After reaching the best position since 2000, the overall budgetary position is also set to deteriorate while the rescue packages could raise public debt.

"The economic horizon has now significantly darkened as the European Union economy is hit by the financial crisis that deepened during the autumn and is taking a toll on business and consumer confidence. Emerging economies are holding up better than the EU and the US, so far, but even they are unlikely to escape unscathed. We need a coordinated action at the EU level to support the economy similar to what we have done for the financial sector. The Commission last week set out a framework for recovery that aims to boost investment, sustain employment and demand. We are looking forward to hearing Member States' views and, especially, for a joint approach at the EU level ", said Joaquín Almunia, Economic and Monetary Affairs Commissioner.

The Commission's economic forecast published projects EU economic growth to drop sharply to 1.4% in 2008. It was 2.9% in 2007. In 2009 the EU economy is expected to grind to a stand-still at 0.2% before recovering to 1.1% in 2010. The equivalent figures for the euro area for the period are 1.2%, 0.1% and 0.9%. In 2007 it was 2.7%.

Global growth slows sharply - Global growth is forecast to slow markedly to 3¾% this year and 2¼% in 2009 after the exceptionally strong 5% average in 2004-2007. Advanced economies will be most affected but emerging economies are also increasingly being hit. This is the result of the financial crisis along with the ongoing correction in house prices in many economies and lagged effects from high commodity prices. During 2010, growth is expected to rise gradually as financial markets stabilise, thereby supporting confidence and trade.

The outlook remains clouded by considerable uncertainty about who will ultimately bear the brunt of the credit losses and what the scale of the loss will be. Credit conditions have tightened significantly and, recent recapitalisation notwithstanding, the banking sector is expected to continue to deleverage, putting a brake on lending.


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