28 April 2008

Spring economic forecast 2008-2009

The Commission's spring forecasts are relatively optimistic with a moderated growth of 2% in 2008 and 1.8% in 2009. The moderation in growth results from the persisting turmoil in the financial markets, the marked slowdown in the United States and soaring commodity prices, all of which are taking their toll on global activity, the Commission states.

The Commission's baseline scenario assumes that uncertainty about the size and location of credit losses will prevail until the end of this year, before gradually petering out during the first half of 2009. The fact that we have not seen much of an effect so far could imply either than transmission lags are longer than expected or that the resilience has improved further than we think in the EU, the Commission says.

The major downside risks relate to the still ongoing turmoil in the financial markets which may reinforce the US downturn further. The uncertainty is still large as regards the impact of the crisis on the real economy. A larger impact could accentuate the ongoing correction of some housing markets notably that of the US, but also within the EU, with the subsequent risk of putting balance sheets under increasing strain. Risks stemming from imbalances in some of the countries with sizeable current-account deficits and/or external debts could be fuelled by shifts in risk preferences following a further deepening and/or widening of the financial crisis.

Further downside risks relate to a disorderly unwinding of global imbalances in general, even if the current outlook already predicts an improvement in the US current-account deficit. Future commodity prices could entail further negative, but also positive surprises.

Although the EU economy is still in a relatively good position to weather the global headwinds on the back of improved fundamentals, investment growth is weakening due to a cooling-off of overvalued housing markets and the cyclical slowdown. Private consumption growth is also set to slow with employment and real wage growth decelerating this year and consumer confidence in steady decline.

The Commission is now forecasting average inflation this year at 3.6% in the EU and 3.2% in the euro area. After peaking in the second quarter of 2008 in the EU, inflation is nevertheless expected to come down to lower levels to 2.4% in 2009 on average (2.2% in the euro area).

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