IP/09/67 Brussels, 19 January 2009Interim forecasts for 2009-2010: slowdown sharpens but growth will come back before the end of 2009GDP growth in the European Union is expected to fall by 1.8 % in 2009 before recovering moderately to 0.5% in 2010. This is the result of the impact on the real economy of the intensified financial crisis, the ensuing global downturn manifested in the severe contraction of world trade and manufacturing output and, in some countries, housing-market corrections. Government consumption and public investment, however, will provide relief. The fact that inflationary pressures have eased also contributes to private consumption. The discretionary fiscal measures announced since August 2008 will limit the contraction in GDP growth by about ¾ pp. this year. The severity of the economic downturn will have a significant impact on employment and public finances over the forecast horizon. "The measures to stabilise the financial market, the easing of monetary policies and the economic recovery plans will enable us to put a floor under the deterioration of the economy this year and create the conditions for a gradual recovery in the second part of 2009. The top priority is to make those measures work effectively: to improve the flows of credit at reasonable prices and to implement the fiscal stimulus packages quickly to stimulate investment and private consumption. To boost confidence, it is also crucial that Member States explicitly commit that they will reverse the deterioration of public finances as soon as we return to normal economic times so as to ensure the medium-to-long term sustainability of public finances", said Joaquín Almunia, Economic and Monetary Affairs Commissioner. Economic growth is forecast to have dropped to about 1% in 2008 in both the EU and the euro area, from just below 3% in 2007, according to the advanced interim forecast released today[1]. In 2009, real GDP is expected to fall sharply, by 1.8% in the EU and 1.9 in the euro area, before recovering by about ½% in 2010. Global economy in recession this year Economic activity worldwide is expected to have fallen markedly in the last quarter of 2008. Declines in recent survey data and incoming orders, among others, indicate that this weakness is likely to persist in the short term. The economic downturn is expected to be broad-based with negative spillovers increasingly affecting emerging-market economies. For 2009 as a whole, world GDP growth is projected to slow down to 0.5% (from 3.3% in 2008 and the exceptionally strong 5% average in 2004-2007). Starting in the second half of 2009, global growth is expected to rise gradually but moderately as the financial market situation improves and the impact of the macroeconomic policy easing (not least in the US) gains traction. Overall, global GDP growth is expected to be around 2¾% in 2010. EU economy also hit hard In the third quarter of 2008 GDP fell by 0.2% in both the euro area and the EU. This implies that the euro area entered its first technical recession as GDP contracted for the second consecutive quarter. Following the further slump in survey data across sectors and countries and the marked deterioration in other leading indicators during the fourth quarter, the outlook is for a continued fall in GDP throughout the first half of this year. The downswing is expected to be broad-based across countries as the financial crisis, the global cycle and, in some Member States, also a housing bust take their toll. The fall in both private and net foreign demand is expected to be a significant drag on GDP growth, with only government consumption and public investment providing relief. In particular private investment, which was a key driving force in the upturn, faces an abrupt slowdown on the back of a substantial drop in capacity utilisation rates, the deterioration in the economic outlook and tighter financing conditions. Unemployment and deficits on the rise The labour market situation started to worsen in most Member States in 2008. Reacting with a certain lag to changes in GDP growth, employment growth is expected to turn negative this year, with EU employment falling by 3½ million jobs. As a result, the unemployment rate is expected to increase to 8¾% in the EU in 2009 (and 9¼% in the euro area), with a further increase in 2010. The worsened outlook is also expected to take a toll on public finances, which will suffer from the reversal of past revenue windfalls, a generally less tax-rich composition of growth and the impact of important discretionary measures adopted and/or announced by Member States (which amount to some 1% of GDP for 2009 in the EU at the time this forecast was finalised). The headline deficit is therefore expected to more than double this year in the EU to 4½% in 2009 (from some 1¾% to 4% in the euro area). Inflation set to fall rapidly Inflationary pressures are abating rapidly. The fierce upsurge in commodity prices that drove inflation to a peak in the summer of 2008 has since been abruptly reversed, amid a rapid weakening in growth prospects for the EU and the global economy as well as deteriorating labour markets. These elements set the stage for a significant downward revision to the inflation outlook compared to the autumn projection. Consumer-price inflation is now expected to fall from 3.7% in 2008 in the EU (3.3% in the euro area) to 1.2% in 2009 (1.0% in the euro area) and just below 2% in 2010 in both regions. Substantial uncertainties at the current juncture This forecast is again surrounded by exceptional uncertainty as the world economy faces its worst crisis since World War II. Risks to the growth outlook are balanced. To the downside, we need to consider the impact of the financial crisis (including on the housing sector) and the severity of the negative feedback loop between the financial and real sectors of the economy. On the other hand, growth could be stronger than expected if inter alia the fiscal packages restore confidence among investors and consumers more swiftly than assumed. Risks to the inflation outlook also appear balanced, following developments in commodity prices and the deterioration of economic prospects globally. A more detailed report is available at: http://ec.europa.eu/economy_finance/thematic_articles/article13727_en.htm[ Figures and graphics available in PDF and WORD PROCESSED ] [ Figures and graphics available in PDF and WORD PROCESSED ] [ Figures and graphics available in PDF and WORD PROCESSED ] [ Figures and graphics available in PDF and WORD PROCESSED ] [1] The Commission usually publishes its interim forecast in February and only for the EU's seven biggest economies and for inflation and growth in the current year. The present exercise resembles more closely the spring and autumn forecasts and is justified by the exceptionally rapid deterioration in the economic situation and outlook since the autumn and the importance of reflecting this in the annual assessment of Member States' Stability and Convergence Programmes.