Faltering growth may herald new recession, warns Rehn

EUROPEAN ECONOMICS commissioner Olli Rehn warned of a “new recession” in Europe as his twice-yearly forecast found that growth in the EU has stalled.

While the commission revised its forecast for Irish growth this year upwards to 1.1 per cent of gross domestic product, it reduced its growth forecast for 2012 after saying that the debt crisis has hit growth in all EU countries.

Mr Rehn said growth in Europe was at a standstill as he cut the forecast for the expansion of GDP in the euro zone and the wider EU next year by 1.25 percentage points to 0.5 per cent.

GDP in the EU is expected to stagnate towards the end of the year and is forecast to recover only very gradually from next spring.

“The outlook is unfortunately gloomy,” Mr Rehn said. “The forecast is in fact the last wake-up call. The recovery has now come to a standstill and there’s the risk of a new recession unless determined action is taken.”

The forecast reflects the impact of the worsening sovereign debt crisis, stating financial market conditions have deteriorated sharply at the same time as the global economy has moved on to a lower growth trajectory.

The weakening real economy, fragile public finances and vulnerable financial sector appear to be mutually affecting each other in a vicious circle, the forecast said.

“The aggravation of the sovereign debt crisis and the deteriorating outlook for the global economy triggered global financial market turmoil amid a generalised reassessment of risk,” it said.

“Uncertainty about the exposure of banks to euro area sovereigns resulted in a freeze-up of interbank lending and a sharp deterioration of the banking sector’s funding conditions.”

On Ireland, the forecast reports a “timid” return to growth but warns that the domestic economy will remain weak. While exports remain solid, the forecast pointed to a “weak” employment outlook.

“External demand will support growth with the domestic economy continuing to shrink, as exports continue to have only a limited impact on the labour market. Overall growth is projected at 1.1 per cent in 2012,” the forecast said.

“Moving to the medium term, growth is expected to pick up to 2.3 per cent in 2013 as the non-traded sectors of the economy return to growth and the labour market begins to improve.”

The forecast said growth in the first half of 2011 was strong, a 1.3 per cent rise in GDP described as a tentative sign of stabilisation.

“Although quarterly output in Ireland is highly volatile, this was the first time since GDP peaked in 2007 that output expanded for two successive quarters,” it said.

Risks remain balanced. “Lower growth stemming from weaker-than-expected global demand in 2012 is a very real risk, as exports comprise a large share of Irish GDP,” the forecast said.

“However, the composition of Irish exports and their relatively non-cyclical relationship with global demand would offset this to some extent. Although growth has returned, a pick-up in employment is likely to lag considerably, which has particularly pressing policy challenges.”

The Government noted the downward revision to the 2012 forecast, saying the Department of Finance marked down its own forecast for similar reasons.

“While the overall picture of an export-led recovery is much the same, there are, of course, some differences between the Department of Finance’s projections and those of the commission for next year. That is the nature of economic forecasting, especially in the current uncertain environment,” a spokeswoman said. The commission’s Irish forecast for 2013 was “very similar” to the department’s forecast, she added.