European Union chops growth forecasts
By William L. Watts, MarketWatch
Last update: 9:22 a.m. EST Jan. 19, 2009Comments: 2LONDON (MarketWatch) -- The European Union on Monday predicted a deep slump for the 16-nation euro zone, forecasting a 1.9% contraction in gross domestic product across the 16-nation region in 2009 -- the first full-year contraction since the single currency was introduced a decade ago.
The new forecasts from the European Commission, the E.U.'s executive branch, mark a call for an unprecedented slowdown from growth of 0.9% in 2008 and a sharp downgrade from Brussels' projection last November of 0.1% growth this year.
For 2010, the E.U. expects growth to rebound by 0.4% -- a level some economists say could prove too optimistic.
Unemployment is forecast to rise from 7.5% in 2008 to 9.3% this year and 10.2% in 2010. Inflation is set to fade from 3.3% to 1% in 2009, then push back to 1.8% in 2010.
The commission said the global financial crisis is now taking a significant toll on the real economy, boosting the risk of a "negative feedback loop" between the financial sector and the real economy that could be stronger and longer lasting than assumed in the current projections.
Efforts by governments and central banks "so far have prevented a systemic meltdown and the situation has improved in some market segments," the commission's report said, "but the overall situation remains fragile."
But economists at Brown Brothers Harriman said the estimates underscored worries that euro-zone officials haven't gone far enough.
"Unprecedented economic conditions require unprecedented macroeconomic responses and unlike in the U.S. or in the U.K., there is still a feeling that the euro zone is behind the curve, both on the fiscal and on the monetary policy front," they wrote.
European Central Bank President Jean-Claude Trichet last week signaled the ECB would likely cut its key interest rate further but not until March, after moving Thursday to match the benchmark's all-time low of 2%, economists said. See full story.
The German government last week approved a 50 billion euro stimulus plan for 2009-10 after data showed the euro-zone's biggest economy was suffering sharply from a plunge in demand for its exports amid slowing world growth.
Also Monday, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on Spain to AA+ from AAA, citing structural weakness in the Spanish economy. See full story.
Outside the euro zone, the E.U. also cut its forecast for the British economy. British GDP is now expected to contract 2.8% in 2009 and to grow by just 0.2% in 2010, the commission said, a major downgrade from the autumn forecast calling for a 1% fall in GDP in 2009.
