Autumn forecast 2009-2011: EU economy on the road to a gradual recovery

The EU economy will emerge from recession in the second half of 2009. A relatively strong temporary pick-up is in the cards for the near term, with a more gradual recovery foreseen in 2010-2011.

The Commission issued on 3 November 2009 its autumn economic forecast in which it foresees that the EU economy will emerge from recession in the second half of 2009. A relatively strong temporary pick-up is in the cards for the near term, following the improvements in the external environment, financial conditions, as well as the significant fiscal and monetary measures - with a more gradual recovery foreseen in 2010-2011.

GDP growth

The Commission forecasts the EU economy emerging from recession and growth turning positive in the second half of this year. Following a certain easing in growth as the impact of the temporary factors peter out, the EU and euro-area GDP will grow by ¾% in 2010 and by 1½ % in 2011. Thus, this outlook rests on the interplay on a number of factors which tend to push the economy in different directions in the short and the medium term. First, the immediate pick-up is mainly due to unprecedented fiscal and monetary policy actions, and several financial indicators getting back to pre-crisis levels, with business climate and consumer confidence indicators constantly rising. Global trade and growth have also strengthened and start to contribute to growth in the EU (albeit less than what is usually the case for the initial stage of the EU business cycle). Further out, a certain easing in growth could follow on the better-than-earlier-expected rebound, as a number of factors could dampen economic activity. These include the projected further deterioration in labour markets, the need for substantial financial deleveraging across sectors, low capacity utilisation, subdued profitability gains and moderated credit growth that all contribute to domestic demand gathering strength only very gradually.

Inflation

Consumer price inflation is expected to rebound from its current very low level. But it will remain relatively low in 2010 at around 1 to 1¼% and 1½% in 2011 in the EU. This is due to the [sizeable] slack in the economy, the relatively muted recovery (further out) and rather weak wage growth's dampening effect, while a certain upward pressure will come from commodity prices again. Differences between countries will be less pronounced than they were prior to the crisis, and inflation expectations are well anchored.

Labour markets

Unemployment has been more resilient to the recession than initially expected mainly due, in particular, to short-term policy measures and labour hording, but also the favourable impact of past reforms. Nonetheless, employment is still expected to contract by about 2¼% in both the EU and the euro area this year and by a further 1¼% in 2010. Altogether, employment could fall by about 7½ million in the EU these two years. The new analytical part of the forecast points to the risks of a 'jobless' recovery depending on the flexibility of the market and the policies in place.

Public finances

Public deficits are set to increase rapidly to 7½% of GDP in 2010 (close to 7% in euro area), due to the combined impact of higher expenditures through automatic stabilisers and discretionary measures to support the economy and financial sector, and decreased revenues due to less economic activity (partly due to less tax-rich components). However, a certain improvement of deficits is expected in 2011 (some 7% in EU and 6½% in euro area) as economic activity picks up again and temporary support measures come to an end.

A sharp increase in debt levels were to be expected following such a deep crisis, but high initial debt levels especially in some countries make it more difficult to sustain. Thus the debt evolution becomes a source of concern for long-term sustainability in several EU countries, as we are faced with combined sustained large deficits, lower potential output, also in view of the unfavourable demographic developments ahead.

Balance of risks

Uncertainties remain very high as the EU economy emerges from the worst recession of the global economy for 60 years in terms of drop in GDP and public deficits. The outlook for economic activity hinges in particular on the impact of the financial crisis on potential output, the strength of the feedback loops between different sectors of the economy as well as the effectiveness of the fiscal and monetary stimulus measures.

The Commission's economic forecast programme

The Commission publishes economic forecasts four times a year. The comprehensive spring and autumn forecasts cover growth, inflation, employment and public budget deficits and debts for all EU Member States and several non-EU countries. The smaller interim forecasts - usually published in February and September - review developments since the preceding forecast for the largest EU economies only.