Europe May Fail to Gather Strength in 2010, EU Says
Europe’s economic recovery may fail to gather strength for most of 2010 as governments phase out stimulus measures and domestic demand remains “subdued,” the European Commission said.
Gross domestic product in the 16-member euro region may rise 0.2 percent in the first, second and third quarters before increasing 0.3 percent in the three months through December, the Brussels-based commission, the European Union’s executive, said today in its semi-annual economic forecasts. In the fourth quarter of 2009, the economy expanded just 0.1 percent.
European domestic demand remains weak and it’s not yet clear to what extent the euro region will benefit from a global recovery, the commission said. Economic confidence unexpectedly declined this month as governments try to stem investor concern about budget deficits in Greece and other nations, which has pushed the euro lower against the dollar.
“All in all the recovery is in progress,” EU Economic and Monetary Affairs Commissioner Olli Rehn said at a press conference in Brussels. Still, it’s “fragile and clearly turning the European economy back on a strong and sustainable path is now our overriding objective.”
Cautious Outlook
The German economy, Europe’s largest, may fail to grow in the three months through March before expanding 0.3 percent in the following two quarters, the commission forecast. France may grow 0.4 percent in the first quarter and stall in the second. The U.K., which isn’t part of the euro area, is seen expanding 0.2 percent in both quarters.
The commission sees the euro-area economy expanding 0.7 percent this year after a 4 percent contraction in 2009, unchanged from its previous forecast in November.
“The question is how robust the global cycle will prove to be and how much EU economies will benefit from it,” the commission said. “Lagged adverse effects from the past euro appreciation cannot be excluded either.”
While the euro has fallen almost 10 percent against the dollar in the last two months on concern that fiscal problems in Greece will spread to other euro nations, the currency is still 6 percent higher than a year ago. The euro declined today and was at $1.3492 as of 11:39 a.m. in London.
Deficit Concerns
Concern about Greece’s ability to finance its deficit and debt has roiled financial markets since the government revealed it had a budget shortfall of 12 cash advance payday loan.7 percent of GDP last year. That’s more than four times the limit allowed for countries using the euro and the highest in the 27-nation European Union.
Standard & Poor’s said late yesterday it may lower its BBB+ rating on Greece by the end of March and Moody’s Investors Service said today it may reduce its A2 grade in a few months.
The commission said that its budget forecast remains “broadly unchanged” from its November assessment, when it projected the region’s deficit would widen to 6.9 percent of GDP in 2010. All euro-area nations will breach EU deficit limits this year and next, the commission forecast.
It also said there’s a possibility that the impact of sliding sovereign bonds could be “broader, weighing further on the recovery” by pushing up financing costs.
On financial markets, “the situation remains highly uncertain,” it said. “Developments in sovereign bond markets indicate that mounting concerns about the sustainability of public finances in some member states could have a stronger adverse impact than currently assumed.”
ECB Meeting
Euro-region inflation may accelerate to 0.8 percent in the current quarter and 1.3 percent in the second quarter, according to today’s report. For the full year, the commission sees inflation averaging 1.1 percent. The European Central Bank, whose governing council meets in Frankfurt on March 4, aims to keep annual consumer-price increases just below 2 percent.
While the euro’s slide against the dollar has helped bolster exports by making them more competitive abroad, it has also boosted costs of imported goods such as raw materials. Crude oil prices have surged 87 percent over the past year.
“The projected sluggish recovery and a large slack in the economy are expected to offset price pressures from slightly higher oil and commodity prices and a lower euro exchange rate vis-a-vis the dollar,” the commission said. “Underlying inflation trends remain largely unchanged.”
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