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EU economy hit hard by global downturn - 19/01/2009

Broker under graph showing steep decline in German stock index © Reporters

Commission cuts economic growth forecast as scale of financial crisis and ensuing global downturn become apparent.

The Commission estimates that economic growth fell to about 1% in 2008 in both the EU and the eurozone (down from just below 3% in 2007). The latest forecast projects that real GDP will contract by almost 2% in both regions in 2009, before growing again by about 0.5% in 2010. These figures are lower than the autumn forecast.

With the EU economy expected to shed some 3.5m jobs this year, unemployment is set to rise. The rate is forecast to reach 8¾% in the EU in 2009 (9¼% in the eurozone), with a further increase in 2010.

Public finances will be hit, too. The headline deficit for EU countries – a raw measure of budget shortfalls – is expected to more than double this year, from 2% of GDP in 2008 to 4½ % in 2009 (from 1¾ % to 4% in the eurozone). As a result, several EU countries are projected to breach or stay over the EU deficit cap of 3% of GDP. A further worsening of the budgetary outlook is expected for 2010.

On the positive side, inflationary pressures are abating rapidly amid faltering commodity prices. Consumer-price inflation is now expected to fall – from 3.7% in 2008 in the EU (3.3% in the eurozone) to about 1% in 2009 and just below 2% in 2010 (both EU and eurozone).

The Commission usually publishes economic forecasts four times a year – comprehensive spring and autumn forecasts and smaller interim forecasts in February and September. But in light of the sharp economic slowdown, the current interim forecast has been expanded. Covering all EU countries, it includes more variables than usual and the full two-year forecast horizon. The next full-fledged forecast will come out on 4 May 2009.

More on financial and economic crisis

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