EU growth will remain at a near standstill during 2012 and return to slow growth in 2013. Unemployment is forecast to remain at the current high levels.
All main indicators point to a stalled recovery with considerable downside risks.
No economic growth is now expected in the current and coming quarters. Consequently, GDP is forecast to grow at a rate of only ½% in the EU and the euro area in 2012. Some acceleration is expected in 2013, when growth is set to reach 1½% in the EU and 1¼% in the euro area. While growth rates will differ across the Union, no group of countries will remain unaffected by the slowdown.
Continued uncertainty in financial markets relating to the sustainability of public finances in some euro area economies as well as fears of contagion affecting the core euro area countries will contribute to subdued growth. The global economy's weakness, including of some of the most important partners for the EU, will reinforce this trend.
The forecast assumes that confidence will gradually return in the second half of 2012 underpinned by the implementation of policy measures that rein in the sovereign debt crisis.
Labour markets are expected to stagnate
Employment growth is expected to come to a standstill in 2012. The rate of growth of the economy projected to prevail over the forecast horizon is judged as insufficient to translate into any gains in the labour markets. Unemployment, therefore, is likely to remain at its current high level of 9.5%, but labour markets of member states will continue to fare differently.
Public finances are on track to improve gradually
Consolidation of public finances has made progress in 2011. Fiscal deficits for this year are projected to stand at 4¾% of GDP in the EU and just above 4% in the euro area. Deficits are forecast to come down and amount to just below 4% and 3½% of GDP in the EU and euro area respectively in 2012.
According to the forecast, the debt-to-GDP ratio will peak in the EU at around 85% in 2012, and stabilise in 2013. In the euro area, however, the debt ratio will continue to rise slowly and exceed 90% of GDP in 2012.
Inflation is expected to fall below 2%
Thanks to lessening pressure from energy prices, inflation is projected to fall below 2% in 2012. The subdued economic activity and modest increases in wages are set to hold inflation in check during the forecast period.
Downside risks to the outlook remain important
Three main risks are identified as weighing on the EU and the euro area economy: continued sovereign-debt-related uncertainty, the weakness of the financial industry and the sluggish world trade. There is a possibility of negative dynamics: slower growth could affect sovereign debtors and this, in turn, could deteriorate the condition of the financial sector, which would be unable to support growth.
On the upside, an earlier-than-expected return of confidence could jump-start investment and private consumption. Moreover, an improvement in the external environment such as a resumption in global growth, could give new impetus to EU exports. Declining commodity prices would also contribute to more dynamic consumption.
The next forecast, an interim one, will be published in February 2012, followed by a full forecast in May 2012.