The European Commission is expecting GDP in the European Union to fall by about 1.8% in 2009 before recovering moderately to 0.5% in 2010.
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Amid exceptional uncertainty about global developments, the European Commission released on 19 January its extended interim forecast. The Commission forecast estimates that economic growth to have dropped to about 1% in 2008 in both the EU and the euro area (down from just below 3% in 2007). In 2009, real GDP is expected to fall by less than 2% in both regions, although growth is projected to remain positive in 9 Member States. This represents a downward revision of about 2 percentage points compared to the previous Commission forecast of last autumn. GDP growth is expected to turn moderately positive in 2010, to around ½%.
The deteriorated outlook is the result of the impact on the real economy of the intensified financial crisis and the ensuing global downturn. The severe economic downturn will have a profound impact on labour market developments and public finances over the forecast horizon, though inflation pressures continue to ease from earlier heights. However, the discretionary fiscal measures announced since August 2008 will limit the contraction in GDP growth by about ¾ pp. this year.
The labour market situation started to worsen in most Member States in 2008. Reacting with a certain lag to changes in GDP growth, employment growth is expected to turn negative this year, with EU employment falling by 3½ million jobs. The unemployment rate is expected to increase to 8¾% in the EU in 2009 (and 9¼% in the euro area), with a further increase in 2010.
Public finances will be hit, too. The headline deficit is expected to more than double this year in the EU, up from 2% of GDP in 2008 to 4½% in 2009 (from some 1¾% to 4% in the euro area). As a result, several Member States are projected to breach or stay over the 3% of GDP reference value in 2009. A further deterioration in the budgetary outlook is expected for 2010.
On the positive side, inflationary pressures are abating rapidly amid faltering commodity prices that drove inflation in the past. Consumer-price inflation is now expected to fall from 3.7% in 2008 in the EU (3.3% in the euro area) to about 1% in 2009 and just below 2% in 2010 in both regions.
The Commission usually publishes economic forecasts four times a year: comprehensive exercises in spring and autumn for all EU countries and lighter interim forecasts published in between, in February and September for the largest economies and a few variables only. The current interim forecast takes an extended format covering all Member States, more variables than usual and the full two-year forecast horizon. This is because of the exceptionally rapid deterioration in the economic situation and outlook since the autumn and the importance of reflecting this in the annual exercise of assessing Member States' Stability and Convergence Programmes.