EU says no recovery until mid-2010

Europe's economy will not start recovering until the second half of next year, the European Commission said on Monday as it slashed its forecasts to reflect the region's deepest recession since World War Two.

• Despite what it called some “positive signals” in recent days, the EU’s executive arm said the economy of the 16-country euro currency zone would shrink 4.0 percent this year and by 0.1 percent next year.
• “The European economy is in the midst of its deepest and most widespread recession in the post-war era,” Economic and Monetary Affairs Commissioner Joaquin Almunia said in a statement.
• “The outlook is still gloomy, but for the first time since mid-2007 some positive signals have appeared in the last week,” he told a news conference later, noting healthier financial markets and an improvement in business expectations indices.
• “We are no longer in a free-fall,” he added.
• The Commission growth forecasts are a sharp downward revision of January 19 projections of a 1.9 percent contraction this year and 0.4 percent growth in 2010.
• The Commission also forecast soaring unemployment that would reach 11.5 percent of the workforce in 2010 and inflation well below the European Central Bank’s target this year and next.
• The ECB meets on monetary policy on May 7, when it is expected to cut its main refinancing rate by 25 basis points to 1.0 percent and announce other ways of policy easing.
• ACTION ON TOXIC ASSETS
• Almunia warned that for the 2010 recovery to happen, Europe had first to deal with toxic assets on banks’ balance sheets that were choking off lending to the credit-starved economy.
• “We need to proceed rapidly with the cleaning up of the impaired assets on bank balance sheets and recapitalise banks when appropriate,” Almunia said.
• The Commission’s growth forecasts are slightly more upbeat than those of the International Monetary Fund, which expects the euro zone to contract 4.2 percent this year and 0.4 percent in 2010.
• But they are more pessimistic than the ECB’s worst-case scenario of a 3.2 percent economic decline in 2009.
• In the wider, 27-nation European Union, the economy would also contract by 4 percent this year and 0.1 percent in 2010, the Commission said, revising its January forecasts of a 1.8 percent recession in 2009 and 0.5 percent growth in 2010.
• “The main factors behind the recession are the worsening of the global financial crisis, a sharp contraction in world trade and ongoing housing market corrections in some economies,” the Commission said in a statement.
• The Commission expects euro zone inflation, which the ECB wants to be below but close to 2 percent over the medium term, to slow to 0.4 percent this year from 3.3 percent in 2008 and accelerate only to 1.2 percent in 2010.
• EASTERN IMPACT
• “The risk of a deflation scenario, i.e. a persistent decline in a very broad set of prices, propagated by a self-reinforcing expectation of further price declines, appears limited at the current juncture, at least at the aggregate level,” the Commission said.
• The EU executive expects unemployment in the euro zone to jump to 9.9 percent of the workforce this year from 7.5 percent last year and soar to 11.5 percent in 2010.
• Europe’s public finances are taking a hit. The Commission forecasts that the euro zone budget deficit will more than triple to 6.5 percent of gross domestic product next year, well above the EU’s upper target rate of 3 percent.
• While Ireland will have the biggest budget gap in Europe with a deficit of 12 percent of GDP this year rising to 15.6 percent in 2010, the effect of the slowdown will also be dramatic in eastern European countries, ending years of growth and potentially undermining their efforts to join the euro.
• Almunia said the Commission would proceed with disciplinary steps versus Malta, Poland, Lithuania and Latvia, the latest in a line of measures taken against states with rising deficits.