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EU Says Eurozone To Undergo Second Year Of Economic Downturn

EU Says Eurozone To Undergo Second Year Of Economic Downturn
2/22/2013 7:47 AM ET

Eurozone is set to contract for the second straight year in 2013 as the region struggles with a deep financial crisis that is currently holding back spending and investment, but pushing up unemployment.

In its Winter forecast released on Friday, the European Commission said the euro area economic activity is now bottoming out and it will gradually accelerate.

The 17-nation bloc is projected to shrink 0.3 percent this year, in contrast to the November estimate of 0.1 percent growth. The weakness seen towards the end of 2012 implies a low starting point for the current year, the commission said.

According to the report, quarterly gross domestic product developments are somewhat more dynamic than the annual figures suggest. GDP in the fourth quarter of 2013 is forecast to grow by 0.7 percent from the same period of 2012.

"The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term," Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro said.

"The decisive policy action undertaken recently is paving the way for a return to recovery."

Domestic investment and consumption are projected to recover later in the year. With domestic demand taking over as the main driver of GDP growth, the region is forecast to expand 1.4 percent in 2014, unrevised from autumn forecast.

On sound economic fundamentals, the German GDP growth is expected to pick up to 2 percent in 2014 from an estimated 0.5 percent expansion in 2013.

In view of a still decreasing household real disposable income linked in particular to rising unemployment, French GDP is projected to increase only by 0.1 percent in 2013. Growth will rise to 1.2 percent next year, the EU said.

Italy is forecast to shrink 1 percent in 2013 before expanding 0.8 percent next year. Similarly, Spain's GDP is expected to grow 0.8 percent in 2014 after falling 1.4 percent in 2013.

The weakness in economic activity is forecast to lift euro area unemployment to 12.2 percent this year from 11.4 percent in 2012. In November, the commission projected rates of 11.8 percent for 2013 and 11.3 percent for 2012.

As the impact of higher energy prices on inflation is expected to wane, inflation is forecast to decrease gradually in the course of 2013 to 1.8 percent and further to 1.5 percent next year. The commission sees balanced risks to the inflation outlook as high unemployment and large output gaps will curb domestic price pressures.

Since many member states are implementing sizable fiscal consolidation measures, the commission projects the fiscal deficit to decrease to 2.8 percent in 2013. The commission expects the reduction of the structural budget balance to advance at a slightly slower pace this year than in 2012.

Spain's budget deficit is expected to widen to 7.2 percent of GDP in 2014 from 6.7 percent in 2013. Italy's deficit is seen at 2.1 percent in both 2013 and 2014.

by RTT Staff Writer

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