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European Commission Sees Slow Recovery Despite Downside Risks


Although Eurozone has entered a technical recession, a recovery is in sight, the European Commission said in its Spring forecast, published Friday. With transitory shocks waning and confidence rebounding, overall EU is expected to return to a subdued growth path.

A gradual recovery is forecast to begin in the second half of the year and gather momentum in 2013. However, downside risks to the GDP forecast continue to prevail, the executive arm of the 27-nation bloc said.

The Eurozone economy is forecast to shrink 0.3 percent this year, in line with February's interim forecast. But, it reflects a downward revision from the Autumn forecast of 0.5 percent growth.

In 2013, the single currency bloc is expected to expand 1 percent, albeit slower than the 1.3 percent previous estimate.

Downside risks emanate from the aggravation of the sovereign-debt crisis with financial contagion and a sharp drop in credit availability, the report said. Also, downside risk stems from the geopolitical uncertainty that could lead to a surge in oil prices.

Growth in Germany, which is the growth-engine of euro area, is forecast to rise to 1.7 percent next year from 0.7 percent in 2012. The second largest Eurozone economy France is expected to grow 1.3 percent in 2013 after expanding by a modest 0.5 percent in 2012, the commission assessed.

The embattled Spain will shrink 1.8 percent this year and contract 0.3 percent in 2013, the commission said. Italy is also estimated to contract 1.4 percent during the whole of 2012, before returning to 0.4 percent growth in the coming year. Only Spain has negative GDP outlook for 2013.

Overall EU real GDP is projected to stagnate in 2012, before improving to 1.3 percent expansion in 2013. The economy is estimated to be currently in a mild recession, the report said.

"A recovery is in sight, but the economic situation remains fragile, with still large disparities across Member States," Olli Rehn, Commission Vice-President for Economic and Monetary Affairs said.

While the slowdown has affected all member states, growth differentials are expected to persist, underpinned by different structural adjustment needs, financing costs and public finances sustainability.

On the back of the already decided consolidation combined with a gradual economic recovery later over the forecast horizon, Eurozone budget deficit is expected to continue declining to 3.2 percent of GDP in 2012 from 4.1 percent in 2011, the commission said.

The deficit reduction in 2012 is underpinned by sizeable fiscal measures, while the fiscal stance underlying the forecast in 2013 is broadly neutral.

The commission sees Spain's budget deficit at 6.4 percent of GDP this year, notably above the 3 percent ceiling and the government's target of 5.3 percent. Italy's budget shortfall is expected to fall to 2 percent in 2012, while Germany's budget deficit is seen at just 0.9 percent.

According to the European Commission, risks to the inflation outlook are broadly balanced. Inflation is set to moderate gradually as the impact of higher oil prices and tax increases fades away.

Eurozone inflation is expected to slow to 2.4 percent this year from 2.7 percent in 2011. The estimate for 2012 was revised up from 1.7 percent. For 2013, inflation is seen at 1.8 percent, higher than the 1.6 percent estimated previously.

The Eurozone unemployment rate is seen at 11 percent in 2013. At the same time, unemployment is expected to remain at 10.3 percent in the EU over the forecast horizon.

by RTTNews Staff Writer

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