EU economy to slide more, panel foresees

A clothing-store employee arranges a window display in Athens, Greece, in January. European Union officials on Friday predicted another year of recession in the 17-nation eurozone.
A clothing-store employee arranges a window display in Athens, Greece, in January. European Union officials on Friday predicted another year of recession in the 17-nation eurozone.

— The euro area economy will shrink in back-to-back years for the first time, driving unemployment higher as governments, consumers and companies curb spending, the European Commission said Friday in its winter forecast.

Gross domestic product in the 17-nation region will fall 0.3 percent in 2013, compared with a November prediction of 0.1 percent growth, the Brussels-based commission forecast. Unemployment will climb to 12.2 percent, up from the previous estimate of 11.8 percent and 11.4 percent last year.

Economic and Monetary Affairs Commissioner Olli Rehn said authorities must press on with changes to end the region’s debt crisis and help the recovery. While “hard data” has been disappointing, there also has been more encouraging “soft data” that points to better times, he told reporters Friday.

The European Commission, the European Union’s executive arm, said the debt crisis and the associated belt-tightening are weighing on activity. Official figures showed the eurozone contracted 0.6 percent in the final quarter of 2012 from the previous three-month period. The eurozone has been in recession since the second quarter of 2012, when concerns about the future of the euro were particularly acute.

Many countries are in deep recessions, such as Greece and Spain, as they push spending cuts and tax increases to deal with their public finances. Others have suffered in the fallout, such as export powerhouse Germany, Europe’s largest economy, which contracted by a quarterly rate of 0.6 percent in the final quarter of 2012.

The commission expects the eurozone recession to bottom out over the first half of 2013. By the fourth quarter, it forecasts that the eurozone economy will be 0.7 percent bigger than the same period in 2012. In 2014, growth of 1.4 percent was penciled in.

“The decisive policy action undertaken recently is paving the way for a return to recovery,” Rehn said.

A number of recent economic indicators have pointed to an improving outlook, particularly in Germany. Much of the recent calm in financial markets with regard to the eurozone has been credited to the debt-reduction measures and a commitment by European Central Bank President Mario Draghi to do “whatever it takes” to save the euro.

“Some signs of a turnaround are now discernible,” said Marco Buti, head of the commission’s economics department. “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 wider economy of the 27-nation European Union, which includes non-euro members such as Britain and Poland, is also bottoming out, according to the commission. Here, too, it lowered its 2013 growth forecast from 0.4 percent to 0.1percent. And in 2014, it expects the world’s largest economic bloc with 500 million people to grow 1.6 percent.

One of the key problems afflicting Europe is unemployment, and the commission said an improvement is unlikely soon, with the unemployment rate in the eurozone swelling to a record 12 percent.

While unemployment is high, the trend is not uniform: Germany has seen unemployment falling while Greece and Spain have seen their rates spike to around 26 percent. The commission expects them to rise to around 27 percent.

“We clearly have a decoupling with different recovery trends, with Germany certainly recovering at a much faster pace,” said Marco Valli,chief euro-area economist at UniCredit Global Research in Milan. “We still have a lot of noise and volatility in the monthly data, but the bottom line is that the eurozone as a whole has already turned.”

The commission forecast that Germany will grow 0.5 percent this year, but France, Europe’s second-largest, will record only 0.1 percent growth. Italy and Spain are expected to decline 1 percent and 1.4 percent respectively.

Meager growth means some governments might have to further tighten their belts - possibly in France, where the 2013 budget is predicated on a growth rate of 0.8 percent.

The commission said France was likely to miss its target of getting its deficit below 3 percent of its annual gross domestic product. Instead, it predicted the deficit will rise from 3.7 percent this year to 3.9 percent next. And it forecast that France’s debt burden will rise from 90 percent of gross domestic product last year to 95 percent in 2014.

Rehn urged the French government to push ahead with measures to reduce its deficit and implement changes to the labor market and to pensions. “France faces significant challenges,” he said.

Tom Rogers, senior economic adviser at Ernst & Young, said he is encouraged with the message coming from the commission.

“Reforms are already bearing fruit in a number of peripheral economies, and this should be an incentive for other governments to follow suit,” said Rogers.

Information for this article was contributed by Juergen Baetz of The Associated Press and by Rebecca Christie, Jeff Black, Jana Randow, Jonathan Stearns in Brussels and Scott Hamilton of Bloomberg News.

Business, Pages 27 on 02/23/2013

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