European Economies Moving Towards Growth After Years Of Contraction: European Commission's August Economic Forecast

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Europe Markets May 8 2012
A European exchange.

Eighteen months ago, the European Union was mired in economic turmoil. The future appeared uncertain, and a breakup of the fledgling currency union seemed plausible, if not imminent.

But according to the European Commission’s autumn economic forecast, released Tuesday, the continent’s economies are moving closer to growth, driven by an increase in domestic demand that is offsetting an ebb in emerging-market growth that has hit the continent's exports.

"There are increasing signs that the European economy has reached a turning point,” said Olli Rehn, Commission vice president for economic and monetary affairs and the Euro, in a press release accompanying the report.  “The fiscal consolidation and structural reforms undertaken in Europe have created the basis for recovery. But it is too early to declare victory: Unemployment remains at unacceptably high levels. That’s why we must continue working to modernize the European economy, for sustainable growth and job creation."

The commission lowered its expectations for euro zone economic growth in 2014 to 1.1 percent from 1.2 percent in its spring forecast. The commission maintained its forecast of a 0.4 percent contraction for the European Union this year. But the commission also expects 0.5 percent gross domestic product (GDP) growth in the European Union for the second half of 2013, compared to the same period in 2012. On an annual basis, GDP growth this year is estimated to be flat in the 28-member European Union and negative 0.4 percent in the 17-member euro zone.

For 2014, the commission expects 1.4 percent GDP growth in the European Union.  

The job market in the euro zone and European Union has only just begun to show signs of stabilizing in recent months. The commission predicts a modest uptick in employment to 10.7 percent in the European Union and 11.8 percent in the euro zone by 2015. But differences between countries will be vast, even among core countries.

Austria and Germany are recovering from a slowdown, while Finland and the Netherlands have experienced a double-dip recession, where a recovery is expected to be gradual.

The U.S. has been a major driver of volatility in the world economy as uncertainty over the politics of raising the debt ceiling coupled with the possibility that the U.S. Federal Reserve will soon discontinue its treasury- and mortgage-bond-buying programs have spurred capital outflows in emerging markets.

In Greece, real GDP contraction has decelerated over the past three quarters, and this summer saw a marked increase in tourism. Because of this, real GDP is set to contract by 0.4 percent in 2013. By 2015, unemployment -- which will hit 27 percent by the end of 2013 -- is expected to fall to 24 percent.

Sovereign debt in Greece is expected to fall from 176.2 percent of GDP this year to 170.9 percent in 2015, while other troubled euro zone nations, including Cyprus and Italy, are expected to see their sovereign debt continue to climb before it levels off. 

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