The European economy is in its deepest recession since World War Two and growth rates will only turn modestly positive in the second half of 2010, the European Commission said on Monday in downwardly revised forecasts.
In its latest economic predictions for the 27-nation European Union and the 16-member euro zone, the EU executive arm said the euro zone economy would shrink 4.0 percent this year and 0.1 percent again next year.
"The European economy is in the midst of its deepest and most widespread recession in the post-war era," Economic and Monetary Affairs Commissioner Joaquin Almunia said.
"But the ambitious measures taken by governments 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," he said in a statement.
The Commission growth forecasts are a sharp downward revision of Jan 19 projections of a 1.9 percent contraction this year and 0.4 percent growth in 2010.
The Commission also forecast soaring unemployment that would reach 11.5 percent of the workforce in 2010 and inflation well below the European Central Bank's target this year and next.
The ECB meets on monetary policy on May 7 and is expected to cut its main refinancing rate by 25 basis points to 1.0 percent and announce other ways of policy easing.
Almunia warned that for the 2010 recovery to happen, Europe had to first deal with toxic assets on banks' balance sheets that were choking off lending to the credit-starved economy.
"We need to proceed rapidly with the cleaning up of the impaired assets on bank balance sheets and recapitalise banks when appropriate," Almunia said.
DEFLATION RISK LIMITED
The Commission's growth forecasts are slightly more upbeat than the International Monetary Fund's, which expects the euro zone to contract 4.2 percent this year and 0.4 percent in 2010.
But they are more pessimistic than the ECB's worst-case scenario of a 3.2 percent economic decline in 2009.
In the whole of the 27-nation EU, the economy would also contract four percent this year and 0.1 percent in 2010, the Commission said, revising its January forecasts of a 1.8 percent recession in 2009 and 0.5 percent growth in 2010.
"The main factors behind the recession are the worsening of the global financial crisis, a sharp contraction in world trade and ongoing housing market corrections in some economies," the Commission said in a statement.
The Commission expects euro zone inflation, which the ECB wants to keep below, but close to 2 percent over the medium term, to slow to 0.4 percent this year from 3.3 percent in 2008 and accelerate only to 1.2 percent in 2010.
"The risk of a deflation scenario, i.e. a persistent decline in a very broad set of prices, propagated by a self-reinforcing expectation of further price declines, appears limited at the current juncture, at least at the aggregate level," the Commission said.
The EU executive expects unemployment in the euro zone to jump to 9.9 percent of the workforce this year from 7.5 percent last year and soar to 11.5 percent in 2010.
