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2009-01-19 | All chapters

Eurozone economy to shrink by 1.9% this year
Xinhua, 19th January 2009

BRUSSELS, Jan. 19 (Xinhua) -- The eurozone economy will shrink by 1.9 percent this year due to the ongoing international financial crisis, the European Commission said in its latest economic forecast Monday.

The report marked a significant downward revision from the commission's last forecast in November, which predicted a growth of 0.1 percent for the euro zone in 2009. The contraction was bigger than the 0.5 percent predicted by the European Central Bank(ECB) last month.

The eurozone economy already plunged into a technical recession in the third quarter of 2008 after registering negative growth of 0.2 percent in two consecutive quarters. The new forecast, however, implied a much deeper and protracted recession for the euro zone as the financial crisis takes its toll on the real economy.

"This is the result of the impact on the real economy of the intensified financial crisis, the ensuing global downturn manifested in the severe contraction of world trade and manufacturing output and, in some countries, housing-market corrections," the EU's executive arm said.

Economic activity worldwide was expected to have fallen markedly in the last quarter of 2008. Declines in recent survey data and incoming orders, among others, indicate that this weakness is likely to persist in the short term.

For 2009 as a whole, world gross domestic product (GDP) growth was projected to slow down to 0.5 percent, resulting in harder times for European exporters.

In the 27-nation European Union (EU), GDP growth was expected to fall by 1.8 percent in 2009 before recovering moderately to 0.5 percent in 2010, according to the commission.

In Europe, the downswing was expected to be broad-based across countries as the financial crisis, the global cycle and, in some EU member states, a housing bust, take their toll.

The fall in both private and net foreign demand was expected to be a significant drag on GDP growth, with only government consumption and public investment providing relief, the commission said.

The commission also forecast that the combined economy of the 16 EU nations that use the euro will not see recovery until the second half of this year, and is expected to grow by about 0.5 percent in 2010, thanks to stimulus measures carried out by member states.

"The measures to stabilize the financial market, the easing of monetary policies and the economic recovery plans will enable us to put a floor under the deterioration of the economy this year and create the conditions for a gradual recovery in the second part of 2009," said Joaquin Almunia, the EU economic and monetary affairs commissioner.

To counter the downswing, EU leaders at a summit in December agreed on a stimulus package that called for a combined spending of 200 billion euros (265 billion dollars) on national measures.

The commission said the discretionary fiscal measures announced since August will limit the contraction in GDP growth by about 0.75 percentage point this year.

With the economy in crisis, the ECB has cut its benchmark interest rate for four times since October.

Due to an abrupt decline in oil prices, a rapid weakening in growth prospects for the EU and the global economy as well as deteriorating labor markets, inflationary pressures in the euro zone are abating.

Inflation is now expected to fall from 3.3 percent in 2008 to 1.0 percent this year and just below 2 percent in 2010, which would allow room for the ECB to make further rate cuts to support economic growth.

Amid a sharp slowdown, the labor market situation started to worsen in most EU member states in 2008. Employment growth was set to turn negative this year, with EU employment falling by 3.5 million jobs.

As a result, the unemployment rate was expected to increase to 8.75 percent in the EU in 2009 and to 9.25 percent in the euro zone, with a larger increase in 2010.

The worsened outlook was also expected to take a toll on public finances, which will suffer from a reversal of past revenue windfalls, a generally less tax-rich composition of growth and the impact of stimulus measures taken by member states.

"To boost confidence, it is also crucial that member states explicitly commit that they will reverse the deterioration of public finances as soon as we return to normal economic times so as to ensure the medium-to-long term sustainability of public finances," Almunia said.

The commission said its forecast was surrounded by exceptional uncertainty as the world economy faces its worst crisis since World War II, but risks to the growth outlook are balanced.

"To the downside, we need to consider the impact of the financial crisis and the severity of the negative feedback loop between the financial and real sectors of the economy, the commission said.

"On the other hand, growth could be stronger than expected if inter alia the fiscal packages restore confidence among investors and consumers more swiftly than assumed."

Source: http://news.xinhuanet.com/english/2009-01/19/content_10686055.htm