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EU: Eurozone recession to be worse, rebound slower

EU: Eurozone recession to be worse, rebound slower

November 8th, 2012 in News

BRUSSELS (AP) - Europe's economy is still reeling and unemployment could remain high for years despite the progress made in solving the debt crisis, the European Union warned Wednesday, as it downgraded next year's forecasts for the 27-country bloc.

The European Commission, the executive arm of the EU, on Wednesday revised down its forecast for the region's gross domestic product, which it now expects to grow by just 0.4 percent in 2013, compared to its expectations this spring of 1.3 percent growth.

The commission had previously expected the 17 countries that use the euro to find its footing next year, with 1 percent growth. Now it predicts only a 0.1 percent uptick.

The report also suggests unemployment won't start falling until 2014 - and then only slightly.

"Europe is going through a difficult process of macroeconomic rebalancing and adjustment, which will last for some time still," Olli Rehn, the EU's economic and monetary affairs commissioner, told reporters. "Market stress has been reduced but there is certainly no room for complacency."

The downbeat forecast helped erase an initial euphoria in markets over President Barack Obama's re-election, with France's CAC-40 stock index and the DAX in Germany both down 1.5 percent in afternoon trading Wednesday.

The eurozone has made progress this year toward resolving its debt crisis, which has been dragging down economies throughout the EU and beyond. Countries that use the euro have slashed spending and promised to keep their deficits in check as well as vowing to protect their banks better by improving how they're regulated and supervised. On top of this, the European Central Bank has put in place a plan to help countries struggling with high borrowing costs, the hallmark of the crisis and the reason some have sought bailouts.

But those measures have yet to be felt in the real economy. The unemployment rate across the eurozone is at a record high of 11.6 percent, and it is 10.6 percent in the wider EU. In the latest in a steady stream of job cuts, Danish wind turbine maker Vestas, Swedish wireless equipment group LM Ericsson, and Dutch bank ING announced a total of almost 7,000 layoffs Wednesday. Eurostat, the EU's statistics agency, also said retail sales in the eurozone shrank 0.2 percent in September.

This commission's predictions for this year reflect that grim reality. It expects the EU's economy to contract by 0.3 percent, rather than remaining flat as it forecast in the spring. It also predicts the eurozone GDP will fall 0.4 percent, against a previous expectation of a 0.3 percent drop.

Official third-quarter GDP figures - which will show whether the eurozone has entered recession as economists suspect it has - are due to be released on Nov. 15. A recession is defined as two quarters in a row with negative growth.

Many economists have argued that, in solving one crisis by cutting government spending and raising taxes, politicians have exacerbated another - slow or negative growth. Meanwhile, tighter banking rules have hurt lending, the fuel economies need to grow.

The commission's report also confirms the crisis is not sparing even Germany, Europe's largest economy and the traditional motor for growth.