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EU says Eurozone economy to shrink again in 2013

Bloc predicts that the economy of the 17-member countries that use the euro will contract again this year

Gulf News

Brussels: The European Union predicted Friday that the economy of the 17 member countries that use the euro will shrink again in 2013 even though it will see its fortunes improve in the second half of the year.

In its winter forecast, the EU Commission, the EU’s executive arm, said the Eurozone is likely to shrink a further 0.3 per cent this year, in contrast to November’s prediction of 0.1 per cent growth.

Across the Eurozone, it said the debt crisis and the associated belt-tightening are weighing on activity — official figures showed the Eurozone contracted 0.6 per cent in the final quarter of 2012 from the previous three-month period. The Eurozone has been in recession — officially defined as two consecutive quarters of negative growth — since the second quarter of 2012, when concerns about the future of the euro were particularly acute.

Many countries are in deep recessions, such as Greece and Spain, as they push spending cuts and tax increases to deal with their public finances. Others have suffered in the fallout, such as export powerhouse Germany, Europe’s largest economy, which contracted by a quarterly rate of 0.6 percent in the final quarter of 2012.

Despite what it terms “headwinds,” the Commission expects the eurozone recession to bottom out over the first half of 2013. By the fourth quarter, it forecast that the Eurozone economy will be 0.7 per cent bigger than the same period in 2012. In 2014, growth of 1.4 per cent was penciled in.

“The decisive policy action undertaken recently is paving the way for a return to recovery,” said Olli Rehn, the Commission’s top economic official.

Improving outlook

A number of recent economic indicators have pointed to an improving outlook, particularly in Germany. Much of the recent calm in financial markets with regard to the Eurozone has been credited to the debt-reduction measures and a commitment by European Central Bank President Mario Draghi to do “whatever it takes” to save the euro.

The wider economy of the 27-nation EU, which includes non-euro members such as Britain and Poland, is also bottoming out, according to the Commission. Here too, it lowered its 2013 growth forecast from 0.4 per cent to 0.1 per cent. And in 2014, it expects the world’s largest economic bloc with 500 million people to grow 1.6 per cent.

One of the key problems afflicting Europe is unemployment, and the Commission said an improvement was unlikely soon, with the jobless rate in the Eurozone rate swelling to a record 12 per cent.

While unemployment is high, the trend is not uniform: Germany has seen unemployment falling while Greece and Spain have seen their rates spike to around 26 per cent. The Commission expects them to rise to around 27 per cent.

The Commission forecast that Germany will grow 0.5 per cent this year, but France, Europe’s second-largest, will record only 0.1 per cent growth. Italy and Spain are expected to decline 1 per cent and 1.4 per cent respectively.

Meager growth means some governments might have to tighten their belts further — possibly in France, where the 2013 budget is predicated on a growth rate of 0.8 per cent.

The Commission said France was likely to miss its target of getting its deficit below 3 percent of its annual gross domestic product. Instead, it predicted the deficit will rise from 3.7 percent this year to 3.9 percent next. And it forecast that France’s debt burden will rise from 90 percent of GDP last year to 95 per cent in 2014.

Deficit reduction

Rehn urged the French government to push ahead with measures to reduce its deficit and implement reforms to the labour market and to pensions. “France faces significant challenges,” he said.

Tom Rogers, senior economic adviser at Ernst & Young, said he was encouraged with the message coming from the Commission.

“Reforms are already bearing fruit in a number of peripheral economies, and this should be an incentive for other governments to follow suit,” said Rogers.

Rehn also urged Italy — which holds national elections this weekend — to continue tackling its debt and strengthening its competitiveness.

“With the elevated level of public debt, it is essential that the country stays on the reform course and maintains a consistent strategy of fiscal consolidation,” he said.

Emergency loans

The European Central Bank said banks will repay only half the amount of emergency loans economists forecast, indicating financial institutions remain wary of lending to each other.

Some 356 banks will hand back €61.1 billion ($80.5 billion) of the ECB’s second three-year loan on February 27, the first opportunity for early repayment, the central bank said in a statement today. That compares with a forecast of €122.5 billion in a Bloomberg News survey of economists. The euro fell almost half a cent after the report to $1.3157.

The ECB flooded banks with more than €1 trillion in two three-year loans after money markets froze because of Europe’s debt crisis. Banks have the option of repaying the funds after a year. They returned more than forecast of the first loan in January.

“Expectations after the initial repayment of the first loan became exaggerated,” said Jan von Gerich, chief fixed- income analyst at Nordea Bank AB in Helsinki. “The current number shows much better how the banking sector is doing. We’re seeing improvements, but it is a slow process.”