It cannot get worse, the pessimist said. Yes, it can, the optimist replied. The optimist in this case is the European Commission, which has presented its spring economic forecast. Our previous forecasts were criticised of being too pessimistic but unfortunately they were confirmed, European Economic and Monetary Affairs Commissioner Olli Rehn commented, while presenting the latest data for 2012. The numbers are significantly revised downwards, compared to the autumn forecast of 2011, and confirm the gloomy picture described by the interim forecast in February.
The European Commission projects the EU`s GDP to remain unchanged in 2012 and grow by 1.3% in 2013, while the autumn forecast projected growth of 0.6% already this year. The euro area economy will shrink by 0.3% in 2012, though the expectations for 0.5% growth last fall and will grow by 1% in 2013. While the outlook for budget deficits is optimistic becase it is foreseen that they will continue to decline thanks to fiscal consolidation, public debts will keep rising, moreover faster than expected last autumn.
The EU 27 indebtedness will rise to 86.2% of GDP in 2012 and 87.2% in 2013 and the eurozone`s - to 91.8% in 2012 and 92.6% in 2013. The reason is low growth on the one hand and increased interest rates on the other. To a journalist question whether these data suggest that the policy of austerity was not working, Commissioner Rehn replied emphatically that this was not the case and defined such a reading as "simplistic". In the analysis of its forecast the Commission recognises that fiscal consolidation will restrain economic activity in the short run, while stressing that "the appropriate choice of fiscal measures and their credibility can limit the adverse short term impact on growth."
The forecast for unemployment is also worse than the expectations last fall - 10.3% for the EU and 11% for the euro area. The Commission expects a slight increase of employment in 2013 as a result of economic recovery and labour market reforms. The Commission expects an increase of European exports in the second half of 2012, due to accelerated growth of the global economy and the depreciation of the euro recently. But the extent to which member states are likely to benefit from this will depend on their regional and product specialisation and their competitiveness positions, the forecast notes.
Large divergences between the countries
The data for Spain were highly anticipated as the country has been currently attacked by the financial markets because of problems with its public finances and the banking sector. Spain will remain in recession until the end of the year, as the economy is projected to shrink by 1.8% and unemployment will continue to rise to 24.4% this year and over 25% next year. As expected, Spain will not be able to meet its fiscal targets neither this nor the next year - the country will end 2012 with a deficit of -6.4% and 2013 with -6.3%, the EC forecast shows.
Commissioner Olli Rehn did not answer directly to a journalist's question whether Madrid will receive a one year postponement to correct its excessive deficit or it will be fined, like Hungary. He explained that the Spanish deficit was based on several levels: the autonomous regions, the social security system and central government, so that the size of the deficit strongly depended on the measures to be taken at different levels. Olli Rehn said that the Commission had full confidence in the determination of the Spanish government to meet its fiscal targets. To that end Madrid should limit excessive costs of the regions and take decisive action to recapitalise the banks, the commissioner said. The Commission notes that a new burst of the debt crisis and an increase of the risk premium on Spanish debt, as well as a deterioration of the bank balance sheets are the biggest risks to the country’s forecast.
Another nation that is facing a strong risk of market attacks - Italy - implements a prudent fiscal policy and does not need additional consolidation measures at this stage, Commissioner Rehn commented. Italian economy will shrink by 1.4% in 2012 and increase slightly in 2013 but unemployment, although slightly increased, will remain below 10%. The budget deficit is within to the norm and is decreasing due to the consolidation efforts of the government, but the debt will grow to 123.5% in 2012. Therefore the main risks the country is facing are tensions on the financial markets and access to finance of both the government and the banks.
As expected, worst is the situation of the countries with bailout programmes, though Ireland again performs better than the Southerners. The Commission forecasts that the Irish economic growth will begin to gain momentum, reaching 0.5% this year and 1.9% next year, due to regained competitiveness and slow stabilisation of the labour market. The European Commission data confirm the February forecast about the biggest economic contractions in Greece (-4.7%) and Portugal (-3.3%). And while the situation in Greece is more uncertain because of the inability to form a government after the May 6 elections, the implementation of Portugal`s rescue programme is well on track and there is no need for additional consolidation measures.
German economy will continue to be eurozone`s engine, although growth of 0.7% this year and 1.7% in 2013 is much lower than what was achieved last year (3%). Berlin`s current account surplus, however, keeps on decreasing gradually, which is good news for everyone accusing Germany of benefiting from poor competitiveness of the euro periphery. Berlin also received a chorus of assent in the last few days after giving clear signals that in the name of the Monetary Union`s survival it is willing to swallow its inflationary fears and encourage wage increases to stimulate domestic consumption.
French economy will grow by 0.5% this year and 1.3% next year, unemployment will remain above 10 percent and the budget deficit, although declining, will remain above 4%: -4.5% in 2012 and -4.2% in 2013 . At this point France is sticking to the fiscal adjustment plan (it has even overachieved its targets for 2010 and 2011), but the government must announce what measures it will undertake in 2013, Commissioner Rehn reminded.
The new EU members go upward (at least some of them)
Poland is once again the EU`s best performer with the highest growth in 2012 - 2.7 (against 4.3% last year). Domestic demand remains the main engine of growth, but the focus has started shifting from consumption to investment. The country is expected to reduce its deficit below the limit of 3% of GDP this year (from 7.8% of GDP in 2010). Poland is an obvious example that fiscal consolidation can go hand in hand with economic growth, although the media prefer to cite the example of Greece in support of the opposite view. Commissioner Olli Rehn in turn pointed Latvia which, together with other Baltic countries, has recovered from the crisis and shows sound growth, as an example of the benefits from implementing the programme of economic reforms and fiscal adjustment.
The forecast for Romania is also good - 1.4% growth this year and 2.9% next year. The EU Commissioner, however, warned the new government to continue the course of fiscal consolidation and reforms. Hungary is an exception among the new member states and will mark a negative growth of -0.3 percent this year. Mr Rehn, however, refused to comment on whether the measures proposed by the Hungarian government to correct the excessive deficit would save the country from the sanctions imposed by Brussels. Their assessment will be part of a detailed analysis of the economic policies of the EU member states to be presented by the Commission on 30 May.
Unlike the other new member states, Bulgaria's economy will grow by only half percent in 2012 and 1.9% in 2013. This forecast is 1.8 pp lower than the autumn forecast of 2.3% growth. The reason for this revision is the impact of the crisis in the euro area and the low confidence affecting investment and consumption. "The recovery is mainly restrained by the weaknesses of the labour market, the continued deleveraging of the corporate sector and a downsizing in the construction sector". Investment will continue to decrease over the year, despite efforts to be supported by the public sector, mainly through the planned significant increase in the absorption of EU funds, the EC notes.
Unemployment will reach 12% before starting to decline in 2013. "Even with weak employment, average wages continued to increase, driven by structural changes in the labour market and the whitening of the economy," the EC`s analysis reads. According to it, the recovery in employment is held back by skill mismatches and a continuous decline of the working age population.
Still the biggest risk to the forecast is an escalation of the debt crisis, to reinforce the negative chain reaction between the volatile financial sector and public debt. Brussels hopes that the measures taken in response to the debt crisis (fiscal discipline, strengthening the EU economic governance, increase the eurozone firewall and the ECB`s financial injections) will regain confidence faster than expected. At this stage, however, risks appear significantly more realistic than hopes.