EU interim forecast: On the brink of a mild recession – A Mild recession with signs of stabilisation

The latest interim forecast of the European Commission, presented on 23 February, points to a stagnation of the EU economy and to a mild recession in the euro area. However, modest growth is predicted to return in the second half of the year.

Growth revised downwards

Against the backdrop of a waning growth momentum and continued low confidence, real GDP is expected to stagnate in the EU and to shrink by 0.3% in the euro area in 2012. This constitutes a downward revision of 0.6 percentage points in the EU and 0.8 percentage points in the euro area compared to the autumn forecast of 10 November 2011. Contrary to earlier interim forecasts that built on the analysis of the seven largest EU economies, projections for the current forecast are based on estimates for all EU Member States.
Divergences between Member States remain pronounced.

At the level of the individual Member States, growth divergences remain pronounced. In 2012, GDP growth is forecast to be positive in seventeen countries (Bulgaria, Denmark, Germany, Estonia, Ireland, France, Latvia, Lithuania, Luxembourg, Malta, Austria, Poland, Romania, Slovakia, Finland, Sweden and the United Kingdom) stagnant in one (Czech Republic) and negative in nine countries (Belgium, Greece, Spain, Italy, Cyprus, Hungary, the Netherlands, Portugal and Slovenia). Growth will be highest in Poland (2.5%), Lithuania (2.3%) and Latvia (2.1%) and lowest in Greece (-4.4%) and in Portugal (-3.3%).
Inflation easing only gradually

On the back of persistently high energy prices, inflation has remained higher than forecast in autumn and is expected to decelerate slowly over the forecast horizon. For 2012 as a whole, the HICP inflation rate is now projected at 2.3% in the EU and 2.1% in the euro area. In 2011, it is estimated to have amounted to 3.1% in the EU and 2.7% in the euro area.

Domestic and global demand prospects

The economic outlook is conditioned by a less supportive global economy, with the ongoing weakening of global demand weighing on net European exports. EU business and consumer confidence are still at low levels, although a recent slight improvement has been noted as the financial sector has shown signs of stabilisation. Also, in the light of subdued demand, credit conditions are not expected to constrain investment and consumption over the forecast horizon. Overall, a gradual return of confidence and a recovery of investment and consumption are expected in the second half of 2012.

Risk assessment

Despite some favourable developments in recent weeks that made the risks to growth more balanced, the downside risks remain substantial. If an aggravation of the sovereign-debt crisis were to result ultimately in a credit crunch and ensuing lower domestic demand, this would probably entail a deeper and prolonged recession. Upside risks to GDP include a stronger-than-expected rebound of confidence and more resilient global demand, stemming from e.g. a stabilisation of housing markets in the US.

Context

The European Commission usually publishes economic forecasts four times a year – comprehensive spring and autumn forecasts in May and November as well as smaller interim forecasts in February and September. As mentioned above, contrary to previous interim forecasts that built on the largest Member States, projections for the current publication are based on estimates for all EU and euro area Member States respectively. The next spring forecast will be published on 11 May 2012.