EU Economic Forecast Too Optimistic

The first unrealistic assumption predicates that the economy in the region has somehow leveled off due to intelligent policy decisions. Data show that nothing could be further than the truth. But the EC report began with the following statement:

Real GDP is set to contract by 0.3% in the EU and by 0.4% in the eurozone in 2012. However, strong policy actions to contain the crisis and measures to improve the functioning of Economic and Monetary Union have helped stabilise the EU economy.

Ongoing increases in unemployment, as well as drops in manufacturing and service activity, indicate that the EC observation cannot be true. But its prediction about gross domestic product marries with another that has to be faulty:

In 2013, a gradual return to growth is expected: GDP is projected to increase by 0.4% in the EU and by 0.1% in the eurozone, although large divergences across member countries will remain. However, competitiveness that had been lost in some EU countries is being gradually restored.

Together with structural reforms, this will pave the way for a stronger and more evenly distributed economic expansion in 2014, when GDP is expected to grow by 1.6% in the EU and by 1.4% in the eurozone.

The primary factor that makes this recovery impossible already has a prominent place at the center of the same evaluation:

Given the weakened economic activity, in 2012 unemployment is expected to reach 10.5% in the EU and 11.3% in the eurozone. It is expected to peak at 10.9% in the EU and 11.8% in the eurozone in 2013 before falling back slightly in 2014.

That observation sits at the core of the matter. Unemployment increases show no sign of improvement at all. As a matter of fact, in many countries the trouble has worsened. Mid-sized economies like Spain find the problem expanding. And among the larger economies in the regions, Italy’s jobless rate is 10.8% and rising, and Germany’s is 5.4%, which has fallen slightly recently. But most economists believe weakness in consumer and business demand will catch up with the region’s largest economy as trade with nations outside the EU cannot entirely offset downward pressure on trade with its neighbors.

The most carefully followed economy in the region may be France, because it is second in GDP and its prospects will either fall toward Germany’s better ones, or toward the recession that have covered the balance of Europe. France’s unemployment rate rose to 10.2% in the third quarter, based on statistics from the International Labour Organisation. France has raised taxes recently, some of which almost certainly will hurt business earnings. Businesses cannot retain current employment levels if their margins get damaged.

How can the EC find support for its forecasts? Based on a lack of a single program to pull Europe out of the present recession and worsening economic data reported from country to country, it cannot.

Douglas A. McIntyre