By Calvin Palmer
The economic downturn in Europe will be twice as deep as previously forecast with the 16 euro-zone economies shrinking 4 percent this year and unemployment reaching over 11 per cent, according to figures from the European Commission.
The economic contraction is double the level estimated just four months ago.
Unemployment is expected to rise to 11.5 per cent by the end of next year, with the loss of 8.5 million jobs.
Despite the grim forecasts for 2009, the Commission stressed that the European economy is set to stabilise in 2010 when the rate of contraction is expected to slow to 0.1 per cent.
Joaquin Almunia, Commissioner for Economic and Monetary Affairs, said: “The European economy is in the midst of its deepest and most widespread recsession in the post-war era. But the ambitious measures taken by the government and central banks in these exceptional circumstances are expected to put a floor under the fall in economic activity this year and enable a recovery next year.”
Almunia told a press conference that despite the gloomy outlook, some encouraging economic signals have recently emerged. He pointed to improving financial markets and better business confidence figures. “We are no longer in free-fall,” he said.
Europe’s biggest economy, export-dependent Germany, was expected to contract by 5.4 percent this year as foreign demand for German products dries up.
Many smaller countries were likely to see even worse recessions, with Latvia due to suffer a stunning 13.1-percent contraction in its economy this year while the once-booming Irish economy is seen shrinking 9.0 percent.
The Commission said in January that it expected euro-zone economies to shrink 1.9 percent this year but has now moved its outlook sharply lower to reflect the more pessimistic growth forecasts of the International Monetary Fund and the Organization for Economic Cooperation and Development.
It has now calculated a 4 percent decline this year for the 27 countries comprising the European Union followed by a small decline in 2010 instead of 0.4 percent growth forecast in January.
The commission expects the region’s average budget deficit to widen to 5.3 percent of output this year and 6.5 percent in 2010, more than three times the gap recorded in 2008, and much higher than the 3 percent European Union limit.
Ireland is expected to report the largest budget deficit and only Finland, Cyprus and Luxembourg will record a budget deficit below the 3 percent level this year.
The Commission expects inflation to slow to 0.4 percent this year before accelerating to 1.2 percent in 2010 which remains below its 2 percent medium-term target. It described the risk of a deflation scenario as “limited”.