Economic outlook for the Euro area in 2009 and 2010
Title: Economic outlook for the Euro area in 2009 and 2010
Editor(s): MARCELLINO, Massimiliano
Series/Number: EFN Report; Summer 2009
External link: http://efn.eui.eu
· The euro area is experiencing an unprecedented drop in economic activity in the first semester of 2009. Private consumption is expected to decrease by more than 1% compared with the same period a year earlier, investment by about 10%, and exports by 16%. The only support to aggregate demand comes from public consumption, which increases by 1.5%. · We do not forecast any major improvement in the euro area economy for the rest of 2009. We expect a year on year decrease of 4.5% in the euro area Gross Domestic Product (GDP) for 2009, with a drop of 1.2% in private consumption, 9.4% in investment, and 14.9% in exports. · Industrial production also fell at a record pace in the first part of 2009. The year on year rate is now close to bottom at about -19%, and there will be only a minor recovery in the coming months, with a final result for 2009 close to -16%. · The relative resilience of private consumption in the euro area is mostly related to the only mild increase in the unemployment rate in several member states, with the remarkable exception of Spain and Ireland. Short time working schemes allow firms to keep workers (and their human capital) at relatively low costs. But clearly, these schemes are only attractive if demand is expected to resurge in a not too distant future. Hence, we expect unemployment to progressively increase from 7.5% in 2008 to 9.5% in 2009, and further to about 11% in 2010. · Uncertain economic perspectives and, more important, difficult financing conditions have prevented investment, and will continue to impede it well into 2010. · Chances for a moderate upswing in 2010 come mostly from an inversion in the investment path in the second part of next year, and from an expected positive growth dynamics in emerging economies, in the absence of major external shocks, which should stimulate euro area exports. Overall, we expect a GDP growth of 0.7% for the euro area in 2010, while industrial production will continue to contract but at a lower rate, -4.5%. · In this recessionary scenario, inflation continues to fall, much as expected. However, while the food prices are decelerating fast, those of services and manufactured goods are remarkably stable. Hence, a further cut of 25 basis points in the official ECB interest rate cannot be excluded but is not very probable. Its effects, however, would be limited.
The European Forecasting Network (EFN) is a research group of European institutions, founded in 2001 under the auspices of the European Commission.
Type of Access: openAccess