European economy ‘will shrink 4%’

EU economies will contract by 4% in 2009, the European Commission has forecast – more than twice what it predicted at the start of the year.

The worsening of the global financial crisis, dropping levels of world trade and continuing house value falls had prompted the huge downgrade, it said.

Europe’s economy would not start recovering until the second half of next year, the commission added.

It also predicted unemployment in the 27-nation EU would reach 10.9% in 2010.

The jobless figure would be 11.5% across the 16 countries using the euro, known as the eurozone, it added.

‘Exceptional circumstances’

“The European economy is in the midst of its deepest and most widespread recession in the post-war era,” said EU Economic and Monetary Affairs Commissioner, Joaquin Almunia.

“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.”

EUROZONE v EU

The 16 eurozone countries are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain

The European Union is made up of those countries in the eurozone plus: Bulgaria, the Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Sweden and the UK

Countries needed to focus on cleaning up banks’ toxic assets, he added.

The commission’s forecast is not as bleak as the outlook from the International Monetary Fund (IMF) – which says eurozone GDP will fall by 4.2% this year.

However it is less optimistic than the European Central Bank which forecast a 3.8% contraction in its latest estimate.

In January, the commission had predicted the eurozone would shrink by 1.9% in 2009 and grow by 0.4% in 2010.

As well as the downward revision for this year, it now expects the eurozone economy to shrink by 0.1% next year.

Irish woes

The commission expects inflation to fall well below the European Central Bank’s target of 2%.

It projects inflation to slow to 0.4% this year from 3.3% in 2008, and to rise to only 1.2% in 2010.

While the downturn was widespread, the extent of economic contraction varied between nations.

Germany, Europe’s biggest economy, is expected to contract 5.4% this year, while the UK and Italy are expected to shrink by between 4% and 4.5%.

However the once-booming Irish economy will see a 9% drop and Latvia will shrink by 13.1%, the commission said.

“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.

Poland rejected the commission’s prediction of a 1.4% contraction in its economy – saying the figure was “mistaken” and that it expected growth. –BBC News