Monday, the European Commission sharply lowered the GDP outlook for the euro area in its Spring Forecast. The commission expects the EU economy to broadly stabilize on support measures in 2010 after experiencing the deepest recession in the post-war era this year.

The 16-nation euro area is now expected to contract 4% in 2009 and 0.1% next year. In its autumn forecast released in January, the commission had estimated a 0.1% growth this year and 0.9% expansion in 2010.

The Brussels-based commission also projected a 4% contraction in European Union's GDP this year, making it the worst recession in the EU since World War II. However, the economy is expected to regain momentum in the course of 2010 with the impact of fiscal and monetary stimulus measures.

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, said Joaquín Almunia, Commissioner for Economic and Monetary Affairs.

The decline in GDP is set to level off towards the end of this year and growth rates to turn positive during 2010 on stabilizing financial markets, improvement in investor confidence and fiscal support and monetary easing.

The commission said global GDP growth is forecast to turn positive again in the second half of 2009 after witnessing a sharp downturn in world trade and industrial production. By next year, global growth is expected to touch 2%.

The budget deficit in the euro area is set to widen to 6.5% in 2010 from 5.3%, while that in the EU is projected to rise to 7.3% from 6% in 2009. The sharp deterioration in the overall fiscal position is in part due to the economic slowdown itself, as automatic stabilizers are relatively large in Europe. But it also signals the sizeable discretionary budgetary stimulus to support economic activity.

In the meantime, the euro area unemployment rate is forecast to rise to 11.5% from 9.9% this year.

Regarding inflation, HICP inflation is projected to be slightly lower than 1% in the EU and 0.5% in the euro area in 2009, and to reach a trough in the third quarter in both regions. Annual inflation for 2010 is seen at 1.2% in the euro area and 1.3% in EU 27.

For the largest Eurozone economy, Germany, a contraction of 5.4% is expected in 2009. The commission projects a recovery with a real GDP growth of around 0.3% in 2010. Meanwhile, the German unemployment rate is projected to climb further to 8.6% next year.

The commission sees no clear signs of recovery in France in the short term. GDP growth is set to remain in negative territory throughout 2009 and sees growth remaining close to stagnation on average next year.

The Spanish economy is also projected to continue contracting in 2010 by around 1%. The decline for the current year is seen at 3.2%, following an estimated 1.2% growth last year.

Dragged down by both domestic and external demand, Italian real GDP fell 1% in 2008. The economy is now projected to log the strongest annual decline in several decades in 2009. After easing 4.4% in 2009, the commission forecasts a 0.1% growth for 2010.

The UK's economic prospects are dimmed by continued restrictive credit conditions, global demand weakness, asset price falls and subdued confidence levels amongst households and businesses. Following a 3.8% decrease in 2009, the GDP is expected to rise 0.1% next year.

Among the 27 member nations of EU, the commission forecasts worst economic outlook for Latvia. A double digit contraction of 13.1% is seen in Latvia during 2009.

The projection of European Commission is similar to the Organization for Economic Co-operation and Development's estimate. The think tank said the euro area economy will contract by 4.1% in 2009 and by 0.3% next year.

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