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Analysis: European economic outlook

The European Union economy is forecast to shrink by 4% this year, according to a report by the European Commission.

The area is “in the midst of its deepest and most widespread recession in the post-war era”, the report says.

“Almost all EU countries are severely hit by the worsening of the financial crisis, the sharp global downturn and ongoing housing market corrections in some economies.”

These revised figures are essentially the same for the eurozone as for the EU as a whole. They represent a “significant downward revision”, compared with previous forecasts.

However, with the “ambitious” fiscal and monetary stimulus measures kicking in, the European Commission expects growth to “regain some momentum” in the course of 2010. Next year, the countries are forecast to contract by 0.1%.

The latest figures, however, continue to reflect the downward trend. Eurostat, the Statistical Office for the European Communities, reports that in March, the volume of retail trade decreased by 0.6% in the eurozone and by 0.3% among the 27 member states of the EU (EU27). Compared with March 2008, the retail sales index decreased by 4.2% in the eurozone and by 3.1% in the EU27.

On month-to-month basis, total retail trade fell in 10 member states, rose in six and remained unchanged in Denmark and Romania, Eurostat says. The highest increases were recorded in Slovenia, where retail trade increased by 6.8%, followed by France which reported a 1.1% rise. In Britain, Austria and Estonia, retail trade increased by 1%. The largest decreases were observed in Lithuania, where retail trade fell by 4.3%. It fell by 3.3% in Poland, by 2.6% in Latvia, by 1.5% in Portugal and by 1% in Germany.

The industrial producer price index fell too. In March 2009, it decreased by 0.7% in the eurozone and by 0.8% in the EU27 on a month-to-month basis, Eurostat says. Compared with March 2008, industrial producer prices dropped by 3.1% in the eurozone and by 2.3% in the EU27.

The highest decreases on a month-to-month basis were recorded in Lithuania and the Netherlands, which both reported a 2.1% drop, and Cyprus which recorded a 1.7% decrease. Eurostat says, the only increases in the total index were registered in Bulgaria (1.1%), Denmark (0.4%) and Sweden (0.1%).

“In the fourth quarter of 2008, in both the euro area and the EU27, the seasonally adjusted household saving rate increased, while the household investment rate decreased,” Eurostat says in another statement.

In the fourth quarter of 2008, the seasonally adjusted gross savings rate of households was 12.2% in the EU27, compared with 10.8% in the third quarter of 2008. The household saving rate was 15.1% in the fourth quarter of 2008, and slightly higher in the euro area. This compares with 14.1% in the previous quarter.

“In both zones, businesses recorded a fall in investment rates and in profit shares,” the Eurostat statement says.

In the EU27, the gross investment rate of non-financial corporations was 22.8% in the fourth quarter of 2008, compared with 23.8% in the third quarter of 2008, Eurostat says. In the euro area, the investment rate was 22.1% in the fourth quarter of 2008, compared with 23.8% in the previous quarter.

The gross profit share of non-financial corporations within the EU27 was 37.5% in the fourth quarter of 2008, compared with 38.0% in the third quarter of 2008. The profit share in the eurozone was 37.6% in the fourth quarter of 2008, compared with 38.7% in the previous quarter.

The Harmonised Index of Consumer Prices, which measures consumer price inflation in the eurozone, is projected to be slightly lower than 1% in the EU and 0.5% in the eurozone, in 2009. The index is likely to pick up next year reaching 1.25%, the European Commission says.

This comes just a few days after Eurostat released an update on annual inflation. Inflation in the eurozone is expected to reach 0.6% in April 2009, Eurostat writes.

“Labour market and public finances are hit hard by the crisis,” the report by the European Commission continues. This year, in both the EU and the euro area, the number of people employed is expected to contract by about 2.5%, and it may contract by a further 1.2% next year. The commission says that employment could fall by about 8.5m in the EU between 2009 and 2010, in contrast to the net job creation of 9.5m between the years of 2006 and 2008.

Eurostat reports that the eurozone’s seasonally-adjusted unemployment rate was 8.9% in March this year, compared with 7.2% in March last year. The EU27 unemployment rate was 8.3% in March, compared with 6.7% the previous year.

The lowest unemployment rate was recorded in the Netherlands (2.8%) and the highest rates were recorded in Spain (17.4%), Latvia (16.1%) and Lithuania (15.5%).

According to the report by the European Commission, the budget deficit is set to more than double this year in the EU, from 2.3% of GDP in 2008 to 6%. The impact of the economic slowdown itself and the sizeable discretionary budget stimulus to support economic activity is expected to increase the deficit further to 7.25% next year.

“Considerable uncertainties” remain, the report says. “The outlook for economic activity hinges in particular on the impact of the financial crisis and the strength of the feedback loops between different sectors of the economy as well as the effectiveness of the fiscal and monetary stimulus measures.”

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