EU: Euro economy to barely grow next year

BRUSSELS, Belgium — The European Commission forecast Monday (Nov 3, 2008) that the economy in the 15 countries that use the euro will barely grow next year, expanding just 0.1 percent as the financial crisis hits hard, AP reports.

The currency zone's largest economies will come to a standstill or shrink, it said in its latest economic outlook, with Germany, France and Italy not growing at all at 0.0 percent.

Ireland and Spain will see output fall and jobless lines and government deficits swell, the EU executive said.

Among EU members that don't use the euro, Britain's economy will slip into recession with minus 1 percent growth, while Baltic states Estonia and Latvia will also see negative growth.

The 27-member EU warned that things may get even worse as forecasters could not rule out a deeper credit crunch that would brake the economy, strain government finances and put a near-freeze on household spending.

Even slightly higher costs for borrowing — an extra risk premium of 0.5 percent on interest rates — would tighten credit available to households and could "trigger an outright recession, a decline of 1 percent of GDP in the euro area," it said.

The labor market should deteriorate sharply next year, it said, with unemployment in the euro-zone climbing to 8.4 percent in 2009 from a decade-low of 7 percent at the end of 2007.

Spain will see the worst of this as a housing bubble bursts and tourism slows. The jobless rate may shoot up to 15.5 percent in 2010 from 10.8 percent this year, the EU says.

EU economists said the outlook for the euro area and the wider 27-nation European Union "remains bleak" with growth contracting this winter before recovering gradually toward the end of next year as exports start to pick up.

It says the euro area likely shrank in the third quarter of 2008 and may grow 1.2 percent for the entire year, 0.1 percent next year and 0.9 percent in 2010. It forecast EU gross domestic product this year at 1.4 percent, falling to 0.2 percent in 2009 and 1.1 percent in 2010.

The only silver lining it picks out is a slide in inflation, down from record highs to an average of 2.2 percent next year as oil prices cool swiftly. This may increase the amount of money people have to spend but they may be less likely to shop if they fear job losses. Private consumption is nearly stagnant, it says.

Oil prices should fall from a 2008 average of US$104 a barrel to US$86 next year, it says. But food and metal prices will probably stay at high levels.

The cost of bailing out troubled banks while tax revenues shrink and welfare payouts swell will see governments pile on debt and run bigger deficits, the EU executive warns.

It says France and Ireland will break EU budget rules in 2009 by running a yearly government deficit of more than 3 percent of GDP. The ceiling is intended to keep their shared currency stable. Britain, Latvia, Lithuania, Romania and Hungary will also likely exceed the limit.

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The Commission also expressed concern about Romania and, to a lesser degree, Bulgaria, which like the Baltics have high current-account deficits. Their growth rate is set to slow, Reuters reports.

"Romania's economy is overheating, but growth is set to slow down. Nevertheless, the current-account deficit will remain at worrying and only slightly falling levels," it said.

The European Commission revised its estimation of Romania’s GDP deficit this year from 2.9 percent to 3.4 percent.

Earlier, the ratings agencies have slashed their outlooks and debt ratings for a string of emerging European and other countries as the credit crunch sparks crises in several economies, Reuters reported on Oct 30.

ROMANIA’s country rating was set at: BB+ (by S&P), Baa3 (by Moody’s), and BBB (by Fitch) -- with a Moody’s rating as ‘stable’.

On Oct 27, Standard & Poor's cut Romania's foreign currency credit rating one notch to BB+, putting it at junk status with a negative outlook and citing a lack of policy response to mounting economic risks.

The International Monetary Fund (IMF) and the World Bank (WB) started visit to Romania between Nov. 3-14 to assess its financial system, but no financial assistance for Bucharest will be discussed, the IMF said on Saturday.

Some economists have said Romania may have to seek international help, including from the IMF, to shore up investor sentiment and safeguard its economy from the impact of the global financial crisis.

However, both Bucharest and the IMF have so far said no agreement was in the works. Romania's neighbours Hungary and Ukraine have both sought help from the lender.

"The Romanian authorities requested this follow-up mission long ago, and its actual timing was decided last year," the IMF said in a statement.

"The mission will not discuss or negotiate IMF financial assistance to Romania."