Europe's gradual recovery maintains momentum
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Europe's gradual recovery continues, with GDP growth expected to grow by around 1¾% this year and close to 2% in 2012. However, the recovery remains uneven across countries. Moreover, despite some improvement in labour markets, the prospect is for a rather jobless recovery. HICP inflation is also set to increase over the coming two years. The trend in public finances is positive as deficits have fallen across most EU countries, but public debt levels remain unsustainably high.
GDP growth is forecast to recover from just above 1½% in the euro area and 1¾% in the EU this year, to some 2% in both regions in 2012.
The gathering pace of recovery is driven by strengthening global growth and upbeat business sentiment in the EU. Notwithstanding stress in some sovereign bond markets, financial market conditions also continue to improve. Lending activity to the private sector has also turned positive.
Rebalancing of growth
A rebalancing of growth is gradually taking hold as a broader array of factors support demand. Export growth is supporting a rebound in equipment investment, while private consumption is expected to pick up slightly this year, and gain steam due to slowly improving labour markets, moderate income growth and lower saving rates.
A multi-speed recovery
While Europe as a whole is growing steadily, the recovery remains uneven. Some countries, in particular Germany, but also some smaller export-oriented economies, have recorded a solid rebound in activity, while others, notably some peripheral countries, are lagging behind. The pace of recovery is expected to continue to vary.
Consumer price inflation has sharply increased since the autumn, as the result of a surge in commodity prices and fears of disruptions to oil supply caused by political instability in the Middle East and North Africa. However, core inflation has remained subdued at close to 1%. HICP inflation is projected to average almost 3% in the EU and 2½% in the euro area this year, before easing to about 2% and 1¾% respectively in 2012.
Employment is projected to see modest growth in both regions this year, while unemployment is expected to decline by some ½ percentage points in both regions. The situation varies widely across countries, however, with the rate of unemployment ranging from 4-5% in the Netherlands and Austria to 17-21% in Spain and the Baltic States.
With a few notable exceptions, public finance outcomes for 2010 were generally better than expected, with most EU Member States posting lower deficits than in 2009. The general government deficit in the EU (excluding Ireland) is projected to fall from about 6½% of GDP in 2010 to around 4¾% in 2011 and 3¾% in 2012, and the euro area is set to follow a similar pattern, albeit at a somewhat lower level.
The debt ratio, in contrast, continues to increase and is expected to reach some 83% of GDP in the EU and 88% in the euro area by 2012. This poses a threat to long-term fiscal sustainability.
The balance of risks for the economic growth outlook is tilted to the downside, while that for inflation are tilted to the upside. Political turmoil in the Middle East and North Africa and the consequences of the natural disasters in Japan have the potential to lead to lower growth and higher inflation than in the baseline scenario. In addition, financial markets are still fragile, bringing a risk of damaging negative feedback loops.
The next interim forecast will be published in September, and the next fully-fledged forecast in November.
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