Euro zone in recession, commission declares

Fri, Feb 24, 2012, 00:00

THE EUROPEAN Commission yesterday said the euro zone had entered its second recession in three years.

Economics commissioner Olli Rehn insisted the recession was “mild” and that the European economy was showing signs of stabilising, but his new forecast said the recovery would be more modest than hoped and would come later this year than previously expected.

With no end in sight to the sovereign debt crisis, the European Commission believes the euro zone economy will shrink by 0.3 per cent this year on a gross domestic product (GDP) basis, while the EU as a whole stagnates.

It previously said the euro zone would expand by 0.5 per cent and the EU by 0.6 per cent.

The commission scrapped the growth forecast for Italy and Spain, saying the Italian economy would shrink by 1.3 per cent, with Spain falling 1 per cent.

It said the expansion of the German economy would continue but at a lesser rate, with growth tipped to ease to 0.6 per cent from 0.8 per cent. Separate data from Munich’s Ifo institute suggests German business sentiment is at its highest level in seven months.

While the commission’s twice-yearly interim forecast is typically confined to the largest EU economies, Mr Rehn said all countries were being assessed now because of “rapidly changing” economic circumstances.

The commission still expects the Irish economy to grow by a “modest” 0.5 per cent this year, the same rate forecast by the EU- IMF-ECB “troika” last month, but down from the 1.1 per cent the commission forecast in the autumn.

This anticipated growth rate is less than half the 1.3 per cent foreseen in the budget by the Government, a figure it is expected to update in April.

Having said last autumn that Ireland’s economy was on track to grow by 1.1 per cent in 2011, the commission now believes the expansion rate was 0.9 per cent.

This is in contrast to the 10 per cent contraction between 2008 and 2010, the year of the bailout.

Asked whether the reduction in the Irish forecast would lead to any demand for further budget cutbacks, Mr Rehn gave no indication either way.

“Concerning Ireland . . . we conduct our more in-depth assessment in the context of quarterly reviews, as we will do next time we conduct a review,” he said.

“Overall, the Irish economy has been recovering, in which the EU-IMF programme has been helpful both in terms of providing financial assistance to the sovereign and by including a very significant package of restructuring and recapitalisation of the banking sector.”

This was essential for restoring confidence in the economy and was crucial for improving growth and job creation, he added.

The commission said weak domestic demand was a key factor in a 1.9 per cent contraction in Irish GDP in the third quarter last year when compared with the previous three months.

With Ireland’s growth almost entirely export-driven, exports held up rather well last year.

“Due to weaker projected outlook for the euro area, Irish export growth is expected to slow down in 2012, although the unchanged outlook for the UK and US economies [large trading partners for Ireland] will provide some support,” the forecast said.