The Euro-area economy will shrink for a second year in 2013, driving unemployment higher as governments, consumers and companies curb spending, the European Commission said. The 17-nation Euro zone’s gross domestic product will fall 0.3 per cent this year, compared with a November prediction of 0.1 per cent growth, the Brussels-based commission forecast today. Unemployment will climb to 12.2 per cent, up from the previous estimate of 11.8 per cent and 11.4 per cent last year, it said.
Europe’s labour market “is a serious concern,” Marco Buti, head of the commission’s economics department, said in a statement. “This has grave social consequences and will, if unemployment becomes structurally entrenched, also weigh on growth perspectives going forward.”
The Euro area is hamstrung by fragile public finances, vulnerable banks and a weak economy feeding, Buti said. The economic weakness contrasts with financial-market improvements, as nations, banks and households improve their balance sheets and hold off on new demand.
The commission cut its forecast for the German economy, Europe’s largest, to 0.5 percent growth this year, from 0.8 forecast in November, due to a drop in euro-area demand that damps export and investment.
The outlook for next year was more upbeat, with 2014 forecasts of 1.4 per cent growth and 12.1 per cent unemployment in the euro area. Across the 27-nation European Union, the commission is projecting 0.1 per cent growth for 2013 and 1.6 per cent growth in 2014, after a 0.3 per cent contraction last year.
The Stoxx 600 Index has climbed about 3 per cent this year after a 14 per cent advance last year. The euro has gained 6 per cent against the dollar the past six months.
Turnaround ‘discernable’
“Some signs of a turnaround are now discernible,” Buti said. “The present forecast projects a return to moderate growth in the course of this year, as confidence gradually recovers and the global economy becomes more supportive.”
The commission said domestic demand won’t improve until 2014, when it should take over as the main driver of growth. Investment is expected to be a drag on the economy this year, subtracting 0.3 per cent from GDP, before offering a 0.4 percent contribution in 2014.
Seven euro-area economies are expected to contract in 2013, with the Netherlands joining Italy, Spain, Portugal, Greece, Cyprus and Slovenia in the new forecast.
Dutch contraction
The Dutch economy will shrink 0.6 per cent this year, while Greece and Cyprus contract 4.4 per cent and 3.5 per cent respectively. Cyprus is the only euro-zone economy where falling GDP is forecast to continue into 2014, with growth next year expected for all other euro countries.
Economic and Monetary Affairs Commissioner Olli Rehn urged nations to keep cutting budgets and overhauling their economies in the face of slowing growth. In a statement, he said any shift away from fiscal consolidation would prolong the downturn.
“The decisive policy action undertaken recently is paving the way for a return to recovery,” Rehn said. “We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation.”
The Euro area as a whole is expected to post a budget deficit of 3.5 per cent of GDP in 2012 and 2.8 per cent in 2013, down from 4.2 per cent in 2011, according to the EU report.
Spain is projected to show a 10.2 per cent deficit for 2012, falling to 6.7 per cent in 2013. France, where President Francois Hollande has tussled with EU calls for more austerity, is projected to post a 4.6 per cent deficit in 2012 and a 3.7 per cent gap in 2013, the commission said.
