Latest economic forecast by European Commission is grim

The European Commission (EC), the executive arm of the European Union (EU), predicts that unemployment within the EU will rise to 9.5 percent by 2010. For the eurozone, countries using the euro as a currency, it predicts unemployment will reach 10.25 percent by the same date.

EU already in recession
Two consecutive quarters showing a drop in gross domestic product (GDP) is the usual definition of recession. The Interim Forecast published on Jan-19 states that the EU economy is already in recession. It predicts the EU GDP will shrink 1.8 percent in 2009. Then recover somewhat to grow by 0.5 percent in 2010.

The EU’s economic powerhouse, Germany is likely to see GDP fall by 2.3 percent this year, France will see a 1.8 percent contraction, Italy and Spain 2 percent. Ireland will be worst hit with a likely 5 percent fall in GDP.

The report predicts 2009 will bring a severe contraction for the Baltic sates. Lithuania will see a 4.0 percent drop in GDP, Estonia 4.7 and 6.9 for Latvia. There have already been riots in Latvia, Lithuania and Bulgaria over perceived government mismanagement. Further economic contraction will likely to lead to more unrest.

Action over breaking of Maastricht rules a possibility
All members of the eurozone are obliged by the Maastricht Treaty to keep public borrowing to below 3.0 percent of GDP. Countries breaking Stability and Growth Pact might well face punitive actions from the EC.

The EC’s report predicts average EU deficit to reach 4.4 percent in 2009, and 4.0 percent for the eurozone. Seven eurozone countries France, Italy, Spain, Portugal, Greece, Ireland and Slovenia will be above Maastricht ceiling. Ireland’s public borrowing is likely to be 11.0 percent of GDP.

Another five EU states outside the eurozone will also exceed the Maastricht ceiling. The UK will see an 8.8 percent deficit. This does not include the latest round of UK bank bailouts.

Euro area inflation under control, deflation not a problem
Economic and Monetary Affairs Commissioner, Joaquin Almunia, told a Brussels press conference on Jan-19, that eurozone inflation would likely be negative in the by mid 2009, but would be positive again in the second half of that year. “We do not consider this as a deflation scenario,” he said.

The UK’s deflationary fears
There is a markedly different outlook in the UK. This week fear of deflation has led the Bank of England (BoE) to set up a mechanism to allow for “quantitative easing”.

Quantitative easing is where a central bank effectively prints money in order to counter deflation. This is a high-risk and last-resort strategy. It is known as “credit easing” in the USA.

Announcing the set up Mervyn King, governor of the BoE, said the world had plunged into, “an unprecedented and synchronized downturn in business and consumer confidence,” and the UK was now in the grip of, “a pronounced contraction in spending and output.” But he said that the BoE had no plans as yet to implement quantitative easing.

The EC’s report may already be out of date. Figures release in the on Jan-22 showed The UK is now in recession. UK GDP shrank 1.5 percent in the last quarter of 2008 after a 0.6 percent drop in the previous quarter.

These figures are worse than most analysts had predicted.

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