The EU economy is projected to return to growth in the second half of 2013. Annual GDP is forecast to contract by 0.1% in the EU and 0.4% in the euro area this year.
Following the recession that marked 2012, the EU economy is expected to stabilise in the first half of 2013. GDP growth is projected to turn positive gradually in the second half of the year before gaining some traction in 2014. Annual GDP this year is now forecast to contract 0.1% in the EU and 0.4% in the euro area. For 2014, economic activity is projected to expand by 1.4% in the EU and 1.2% in the euro area.
At present, domestic investment and consumption are still being held back by balance-sheet adjustment and credit supply constraints in some countries, low expectations about future profits and income, as well as high uncertainty about the economic outlook. While the financial market situation has improved significantly and interest rates have declined, this has not yet fed through to the real economy. There are so far only timid signs of easing financial fragmentation across Member States, and enterprises in vulnerable economies continue to face tight credit conditions.
Net exports drive growth this year
The adjustment of external and internal imbalances is making progress, and a number of vulnerable Member States are expected to register current-account surpluses this year amid improved profitability of the export sector. (Please see the box on the right side which discusses the link between unit labour costs, profit margins and prices in the context of rebalancing economies.)
In the light of the constrained domestic demand net exports are set to be the main growth driver this year. The headwinds on private consumption and investment in the EU are expected to abate gradually, making way for a modest domestically sustained recovery next year. This forecast is based on the assumption that continued policy efforts will prevent a renewed intensification of the sovereign-debt crisis.
Unemployment set to stabilise
The projected recovery of economic activity is expected to be too slow to reduce joblessness. Unemployment is forecast to reach around 11% in the EU and 12% in the euro area in 2013 and to stabilise at these levels in 2014, while differences across Member States will remain very large.
Consumer-price inflation has continued to slow down in recent quarters, as the impact of past energy-price increases has been fading. Inflation is projected at 1.8% in the EU and 1.6% in the euro area in 2013, stabilising at 1.7% and 1.5%, respectively, in 2014.
Fiscal deficits are reduced
The reduction in fiscal deficits is set to continue. They are projected to fall to 3.4% of GDP in the EU and 2.9% in the euro area in 2013. The pace of consolidation in terms of structural budget balances is expected to be slower than in 2012. In light of the weak outlook for economic activity, debt-to-GDP ratios are forecast to reach around 89.8% this year in the EU and 95.5% in the euro area.
Impact on potential output
The forecast document also discusses the impact of the crisis on potential output (please see box on the right side). Based on the developments over the last four years, one can conclude that the most likely long-run impact of the crisis will be a reduction of the euro area's potential output by roughly 5%. But it is likely that there won't be a long-run effect on potential growth rates.
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