EU sees growth returning in third quarter - Commission underlines fragile nature of recovery

EU sees growth returning in third quarter - Commission underlines fragile nature of recovery
By Tony Barber in Brussels
Copyright The Financial Times Limited 2009.
Published: September 14 2009 12:12 | Last updated: September 14 2009 14:17
http://www.ft.com/cms/s/0/9e1e53d8-a11d-11de-a88d-00144feabdc0.html


The European Union will return to economic growth in the third quarter of this year as government spending programmes and record low interest rates pull the 27-nation bloc out of its worst ever recession, the European Commission predicted on Monday.

Presenting its latest economic forecasts, the Commission estimated that quarter-on-quarter growth would rise to 0.2 per cent between July and September from minus 0.1 per cent between April and June. Growth in the fourth quarter was forecast to ease to 0.1 per cent.

In spite of the improving outlook, the Commission cautioned that Europe’s economic recovery was fragile, with credit flows to businesses and households still weak and unemployment set to rise sharply.

“Looking into next year … uncertainty is rife. There are reasons to believe that the recovery could prove volatile and sub-par,” the Commission said.

In a report underlining the Commission’s argument, Eurostat, the EU’s statistical agency, said on Monday that employment levels in the 16-nation eurozone had fallen by 0.5 per cent – representing 702,000 people – in the second quarter of this year compared to the first.

It forecast that the EU would suffer a contraction in economic growth of 4 per cent in 2009, largely because the recession was at its worst in the first three months of the year.

Joaquín Almunia, the EU’s monetary affairs commissioner, said the bloc would owe its emergence from recession to a pick-up in world trade, the European Central Bank’s decision to keep interest rates low and inject vast amounts of liquidity into the financial system, and the deficit-spending initiatives of governments over the past 12 months.

Fiscal support measures from governments would amount to 1.4 per cent of gross domestic product this year and another 1.1 per cent of GDP in 2010, Mr Almunia told a news conference.

In addition, the European economy has been sustained by the operation of so-called “automatic stabilisers”, or welfare expenditure programmes such as unemployment benefits, that come into effect during a recession.

Mr Almunia estimated that the aggregate effect of deficit-spending measures and the automatic stabilisers amounted to 5.5 per cent of GDP in 2009 and 2010.

The Commission’s forecasts showed significant differences in the performances of individual countries. Among the EU’s biggest six countries, only Poland is projected to record economic growth this year – a modest 1 per cent.

Thanks to relatively firm levels of domestic demand and a recovery in their export markets, France and Germany are emerging more successfully from recession than Italy, which is suffering from poor competitiveness and a lack of fiscal support measures, and Spain, hit hard by a slump in its construction industry.

France is expected to record a 2.1 per cent fall in economic growth this year. Germany will suffer a 5.1 per cent drop, Italy 5 per cent, the UK 4.3 per cent and Spain 3.7 per cent, the Commission estimated.