Thank you for joining us at this presentation of the Commission’s February 2012 interim forecast.
As usual it covers the outlook for GDP growth and inflation in 2012. Due to the rapidly changing economic circumstances, the Commission decided to extend the coverage from the 7 biggest Members States to all 27 Member States.
The key messages are the following :
• GDP of the EU is expected to remain unchanged in 2012, while the euro area has entered a mild recession.
• Compared to our November forecast, prospects have worsened and risks to the growth outlook remain – but we are seeing signs of stabilisation.
• Inflation in the EU in 2012 has been slightly revised up compared to autumn, due to persistently high energy prices and increases in indirect taxes.
Let me start with external conditions. The temporary weakening of global demand, which we expected in November, is going on.
World trade growth has weakened since spring 2011, and is expected to recover only gradually in 2012.
Also, the Global Purchasing Managers Index (PMI) has slowed down in 2011, although it continues to indicate modest expansion of industrial output.
There are substantial differences across regions.
Among the advanced economies, the US has recently shown signs of a moderate recovery, as the labour market improved and consumption rebounded. By contrast, in Japan the economy has ended 2011 on a weak note, although the perspective of moderate growth in 2012 remains intact. Many emerging market economies continue to do better than advanced economies.
Overall, the global economy –excluding the EU – is expected to grow by 4.3% in 2012.
Financial markets remain fragile still, but there are also signs of stabilisation.
Sovereign yield spreads have eased in several countries, although they remain at elevated levels. With the exception of Greece, spreads have come down since mid-November in recognition of the determined measures by vulnerable countries and at European level. The successful sovereign bond auctions are further evidence. Also, the market reaction to sovereign credit-rating downgrades since December has remained muted.
As regards credit conditions for the private sector, they have been tightening lately. But there are no signs of a credit crunch. Moreover, the data were collected until December, so may not fully take into account latest improvements.
The new liquidity measures by the ECB have contributed to the improvement, as banks have now access to longer maturity funding and can use a wider range of eligible collateral. With subdued demand, credit conditions are not expected to constrain investment and consumption over the forecast horizon.
Moreover, the European Banking Authority reported earlier this month that the recapitalisation plans do not point to massive deleveraging, as some had initially feared.
Since last autumn, confidence has been trending down. But it seems to have begun improving recently.
The Commission’s Economic Sentiment Indicator (ESI) for the EU showed a moderation of the sharp downward trend during the fourth quarter of last year. In January 2012, it rose for the first time since May 2011. Whether this constitutes a turning point in confidence, will depend on the policy decisions at national and EU level, to which I come later.
The EU composite PMI readings have been slightly more positive, showing a gradual increase of the index since November. In January, the index stood above the threshold of 50 points, signalling a marginal increase in economic activity in the EU. The February reading, which came out yesterday, seems in line with our forecast.
Overall, recent developments in survey data suggest that the expected slowdown will be mild and temporary, but the turnaround of the trend still needs to be confirmed in the coming months.
Given these preconditions, our growth forecast looks as follows.
You can see the loss of growth momentum in the EU towards the end of 2011. In the final quarter of 2011, according to Eurostat’s Flash estimate, GDP contracted by 0.3% from the previous quarter in both the euro area and the EU. This weakness will carry through to the first quarter of this year, while we expect growth to resume in the second half of this year.
On an annual basis for 2012, GDP growth is now forecast at 0.0% in the EU and -0.3% in the euro area. This is a downward revision of 0.6 pp. and 0.8 pp. respectively compared to the November forecast.
This growth profile is based on the assumption that the uncertainty related to the sovereign-debt crisis will gradually fade over the forecast horizon.
On the back of persistently high energy prices, core inflation has been stabilising at about 2% and headline HICP inflation has decreased only gradually. Recent increases of indirect taxes have also contributed to this picture.
Given the weakening picture on GDP growth, inflation is expected to trend on a slowly decreasing path over the forecast horizon.
For 2012 as a whole, the HICP inflation rate is now projected at 2.3% in the EU and 2.1% in the euro area.
Europe has recently taken decisive steps for the comprehensive crisis response in five points.
First, uncertainty about a second programme for Greece has been removed. Next months are now critical in implementation.
Second, good, but not yet sufficient, progress has been made to establish an adequate firewall against contagion in sovereign-debt markets. I believe that will be resolved next week in the Summit.
Third, a better capitalisation of EU banks is well underway and funding stress has eased.
Forth, the framework for economic governance in the euro area has been reformed and is being implemented as it should.
Last, structural reforms to enhance our growth potential are being undertaken. The programmes in Portugal and Ireland are on track, Italy and Spain are implementing important structural reforms. We will, in the European Semester, bring together the growth-enhancing policies across the EU, both at national and at EU level.
The mild recession can be short-lived and confidence return more rapidly than expected, on the condition that continued, steady and decisive progress is being made on these policy areas.