The European Commission on Friday lowered the economic outlook for euro area for this year as well as the next, saying that the recovery of economic activity is expected to be too slow to reduce joblessness.
In its latest Spring 2013 Forecast, the commission said that the euro area economy will contract 0.4 percent in 2013, steeper than a 0.3 percent shrinkage predicted in February as the region heads into its second year of recession.
The 17-nation economy is expected to start recovering in 2014 with the gross domestic product seen increasing at a rate of 1.2 percent. This was also, however, weaker than a 1.4 percent growth projected in the Winter Forecast in February.
Domestic investment and consumption in euro area are still being held back by balance-sheet adjustment and credit supply constraints in some countries, the EU said in the report.
The commission forecast 12.2 percent unemployment in the euro area this year, up from 11.4 percent last year. The rate is expected to stabilize at these levels in 2014. Employment is projected to fall further this year while a more dynamic GDP growth is expected to start lifting employment in 2014.
"In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe," European Commission Vice-President for Economic and Monetary Affairs Olli Rehn said.
"The EU's policy mix is focused on sustainable growth and job creation," Rehn said. "Fiscal consolidation is continuing, but its pace is slowing down."
At the same time, he stressed on the need to intensify structural reforms to unlock growth in Europe.
The commission slashed the growth outlook for Germany for this year to 0.4 percent from the previously estimated 0.5 percent. The forecast for 2014 was also cut to 1.8 percent from 2 percent.
The French economy is seen contracting 0.1 percent this year, in contrast to the earlier prediction of 0.1 percent expansion. In 2014, the economy is forecast to grow 1.1 percent, which is weaker than the February prediction of 1.2 percent growth.
In Italy, recession is expected to be steeper-than-predicted in 2013. The EU forecast Italian GDP to shrink 1.3 percent this year, before growing 0.7 percent next year. These forecasts were weaker than February projection of 1 percent contraction and 0.8 percent growth for 2013 and 2014, respectively.
The Spanish economy is now forecast to contract 1.5 percent this year, steeper than 1.4 percent contraction seen earlier. However, the GDP outlook for 2014 was raised slightly to 0.9 percent growth from 0.8 percent predicted in February.
In all, eight euro area economies are expected contract this year. Cyprus' economy is now projected to shrink 8.7 percent this year, much sharper than 3.5 percent predicted earlier, affected in particular by the immediate restructuring of the banking sector.
Greece is set to witness the sixth consecutive year of recession in 2013, but a recovery is expected to start by the turn of the year, supported by improved confidence and the return of liquidity, the report said. Recession in Greece is expected to ease in 2013 with GDP contracting at a slower pace of 4.2 percent before expanding 0.6 percent in 2014.
Unemployment rate in Spain and Greece is expected to peak at 27 percent this year, before falling slightly to 26 percent in 2014.
In euro area, the gradual decline of inflation is expected to continue this year, and it is now projected at 1.6 percent in 2013, stabilizing at 1.5 percent in 2014.
In the EU, annual GDP is now forecast to fall 0.1 percent this year instead of 0.1 percent growth forecast in February. For 2014, economic activity is projected to expand 1.4 percent compared with 1.6 percent expansion forecast previously.
Headline fiscal deficit is projected to fall to 2.9 percent of GDP in the euro area in 2013 from 3.7 percent in 2012. The pace of consolidation in terms of structural budget balances is expected to be slower than in 2012, the Commission said.
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