FRANKFURT (MNI) – The EU Commission left its 2010 Eurozone GDP
forecast unchanged at 1.7% y/y on Monday and said that the recovery is
set to become “increasingly self-sustaining.”
Nevertheless, the Commission cautioned that the recovery remains
uneven across the Eurozone and warned of challenging times ahead in the
face of the Eurozone’s sovereign debt crisis.
The Commission still sees 2010 GDP growth at 1.7%, unchanged from
September when it raised forecasts from the +0.9% it had projected in
May. The sizable upward revision at the time was mainly driven by a
strong performance in the first half of 2010, the Commission said. For
Q4 2010, the Commission projected GDP growth of 0.25% q/q.
Looking further ahead, the Commission projects GDP growth of 1.5%
in 2011 and 1.8% in 2012.
As for inflation, the Commission slightly raised its 2101 HICP
forecast to 1.5% from 1.4% and said it expects HICP of 1.8% in 2011 and
of 1.7% in 2012, which suggests inflation over the medium-term will
remain within the European Central Bank’s price stability definition of
close to but below 2%.
“The remaining slack in the economy, along with fairly moderate
wage and unit-labour cost growth are expected to keep inflation in check
going forward, notwithstanding slightly higher commodity prices and
increases in indirect taxation and administered prices in some Member
States,” the report said. Well-anchored inflation expectations offer
further support to this outlook, it added.
The Commission said that the risks to its growth and inflation
forecasts are broadly balanced.
Looking more closely at the economic outlook, the Commission said
that “near-term growth prospects for the EU economy appear rather
subdued” but that they continue to point upwards.
“Whereas the projected softening of the global environment and
fiscal consolidation are expected to have a dampening effect, especially
next year, further improvements in financial-market conditions and the
broadening out of the recovery are expected to support activity in 2011
and 2012,” the report said.
“Indeed, with private demand gradually strengthening over the
forecast horizon, the recovery is set to become increasingly
self-sustaining,” the report said.
It also noted that “a further gradual improvement in financial
conditions is expected over the forecast horizon, as economic activity
strengthens and fiscal consolidation program are implemented.”
Still, “the road ahead is set to remain rough, with periods of
stress likely in light of still significant challenges,” it cautioned.
The Commission warned that “developments across Member States
remain uneven however, more so than in the spring, with the recovery
advancing at a relatively fast pace in some, but lagging behind in
others.” While forecasts for Germany were revised upward, Greek
forecasts had to be slashed, it noted.
It cited “the need to correct persisting imbalances” within the
Eurozone as a key challenge to ensure sustainable growth ahead and calm
market tensions surrounding the currency union’s sovereign debt.
The forecast report also acknowledges that the strong
deficit-cutting medicine being taken by most EMU countries will likely
have a contractionary impact on GDP and jobs in the short run. “But
these effects can become positive in the medium run by reducing
government interest payments and creating space for future tax
reductions,” it said.
It said policymakers must seek to minimize the short-term pain
while maximizing the longer-term gains. That means, first and foremost,
that budget consolidation plans must be viewed as “credible” and not
susceptible to change with the next political wind that blows, the
Commission said. Making them part of a wider agenda to reduce external
imbalances and promote growth, and enshrining them in legislation, would
be desirable, it said.
The report also noted that if fiscal retrenchment could be
accompanied by supportive monetary policy, it would “significantly
reduce the negative short-term impact on output and employment.” But it
later points out that “monetary policy at the current juncture is
constrained by the zero interest rate floor, which increases GDP effects
of fiscal changes.”
And while exchange rate depreciation might traditionally be a means
of cushioning the impact of budget cuts, “it is not a channel that can
be relied upon at present given the synchronisation of consolidation
efforts globally and the general uncertainty that surrounds global
exchange rate developments,” the Commission said.
The report noted that Eurozone governments have made progress in
addressing excessive deficits. In the region, a deficit of some 6% of
GDP is expected this year on aggregate, falling to around 4.5% in 2011
and slightly below 4% in 2012. “The picture here is also somewhat
brighter than in the spring,” the Commission noted.
The debt-to-GDP ratio, on the other hand, is projected to remain on
an upward path over the forecast horizon. The pace of the increase is
set to moderate somewhat though, largely on the back of less negative
primary balances going forward. But it is still seen rising to almost
88% by 2012 in the euro area.
Again, the Commission said that addressing overstretched deficits
and debt levels in the euro area “stands out as particularly urgent at
this time” in order “to tackle sovereign-debt tensions and break the
negative feedback loop between developments in sovereign-bond markets,
the banking sector and economic growth.”
–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com
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