The outlook for the euro-region has substantially worsened in the past month and the euro-area economy will contract this year for the first time since the currency was introduced, a report from the European Commission cautioned yesterday.
In its Interim Report of economic forecasts for the region the EC said the economy of the 16 countries sharing the euro will shrink 1.9% in 2009, revising a November estimate for growth of 0.1%. The new forecast is more pessimistic than the 0.5% contraction predicted by the European Central Bank last month.
This prompted ECB President Jean-Claude Trichet to warn that the outlook for the euro-region economy is “substantially” worse than the bank predicted a month ago.
“The year 2009 will be very difficult,” Trichet said. “Growth in the world and Europe will be substantially below what” most institutions projected at the start of December, he said.
The report predicted Ireland will be particularly hard hit, with the economy set to shrink by 5% — the weakest in the euro area and second worst only to Latvia in the wider EU. European companies are slashing spending and jobs as they grapple with a global slump that’s eroding demand for everything from chemicals and automobiles to luxury goods.
As growth contracts, the ECB has cut its key interest rate to match the lowest since the euro’s launch in 1999, while European governments have orchestrated bank rescues and fiscal-stimulus packages to bolster their economies.
The economic slump deepened in the fourth quarter, according to the commission, which estimates that gross domestic product shrank by 1.5 percent in the final three months of the year after a 0.2 percent contraction in the previous two quarters. The economy will continue to contract in the first two quarters of this year, it said.
The euro region’s average budget deficit is forecast to exceed the European Union limit for the first time in six years as the 16 nations using the currency grapple with the worst financial crisis since World War II.
The deficit of the euro-area nations will increase to 4% of gross domestic product this year from 1.7% of GDP in 2008, the European Commission forecast. That would put the budget shortfall above the EU’s 3% ceiling for only the second time since the euro’s introduction a decade ago.
“We are living in a very difficult situation,” EU Monetary Affairs Commissioner Joaquin Almunia told reporters in Brussels in presenting the commission’s economic forecasts. We will stick to the way we have enforced the budget rules in the past”, he said.
The ECB last month forecast the euro-region economy would contract about 0.5% this year. Since then, data suggest Europe has slipped deeper into recession. The European Commission today projected the 16-nation economy will shrink 1.9 percent in 2009.
While the ECB is not scheduled to revise its forecasts before March, Trichet said the bank’s 22-member Governing Council took account of the deteriorating outlook in deciding to cut its benchmark interest rate to 2% last week. As the euro-area economy slumps, unemployment will rise and the region’s budget deficit may breach the EU limit of 3% of GDP for the first time since 2003, according to the commission.
Despite European confidence plunging to the lowest on record and unemployment rising to a two year high of 7.8%, Trichet said there are reasons to expect the economy to rebound.
“I consider that 2010 will be the year of recovery,” Trichet said.