Euro area is set to enter a mild recession in 2012 after the economic recovery stalled unexpectedly late last year, and given the pronounced growth divergence among member nations, the European Commission said Thursday.
The region will return to modest growth by the second half of this year, the commission said in the interim forecast released today. Nonetheless, uncertainty remains high and inflation will decelerate only gradually over the forecast horizon, the EU's executive arm said. "Although growth has stalled, we are seeing signs of stabilization in the European economy," Commission Vice-President for Economic and Monetary Affairs Olli Rehn said.
"With decisive action, we can turn the corner and move from stabilization to boosting growth and jobs." The Brussels-based commission downgraded the 2012 gross domestic product outlook to indicate contraction in the 17-nation bloc, while it raised the inflation forecast citing persistently high energy prices and increases in indirect taxes.
The Eurozone economy is expected to contract 0.3 percent this year, compared to the 0.5 percent expansion estimated in the autumn forecast published in November.
The downside risks remain substantial despite some favorable developments in recent weeks, the commission said. If the debt crisis ultimately results in a credit crunch and ensuing lower domestic demand, this would probably entail a deeper and prolonged recession, it assessed.
On the back of persistently high energy prices, inflation has remained higher than forecast in autumn and is expected to decelerate slowly over the forecast horizon. For 2012 as a whole, the HICP inflation rate is projected at 2.1 percent. In 2011, it is estimated to have amounted to 2.7 percent.
Amid waning growth momentum and ongoing low confidence, the 2012 real GDP is expected to remain flat in the EU. This constitutes a downward revision of 0.6 percentage points compared to the autumn forecast of November. At the same time, inflation is seen at 2.3 percent. Risks to the EU growth outlook for 2012 are seen tilted to the downside. According to commission, GDP growth is forecast to be negative in nine countries, stagnant in one and positive in seventeen. Latvia, Lithuania and Poland will have the highest growth, while Greece and Portugal, with 4.4 percent and 3.3 percent contractions, respectively, would be the worst performers.