Europe’s economic situation has improved markedly since the second quarter of 2009, pointing to a better growth outlook for the second half of the year, but it remains questionable how sustainable economic recovery will prove to be, the European Commission (EC) said on September 14 2009.

As economic activity at the end of 2008 and beginning of 2009 was worse than initially estimated, GDP is still expected to fall by four per cent overall this year in both the EU and the euro area, as forecast in the spring.

"However, uncertainty remains rife, and while the recovery may surprise on the upside in the very short term, how sustainable it will be remains to be seen," the EC said.

The Commission's forecasts for inflation in 2009 also remain unchanged at 0.9 per cent in the EU and 0.4 per cent in the euro area, with the base effects of past hikes in energy and food prices, which were pushing prices down, fading away and no other significant inflationary pressures in view.

The forecasts emerged in parallel with new figures about unemployment and industrial production.

In July 2009 compared with June 2009, seasonally adjusted industrial production fell by 0.3per cent in the euro area and by 0.2 per cent in the EU27. In June, production decreased by 0.2 per cent and 0.1 per cent, respectively.
 
In July 2009 compared with July 2008, industrial production declined by 15.9 per cent in the euro area and by 14.7 per cent in the EU27 .
 
The number of people employed in the euro area fell by 0.5 per cent (702 000 people) in the second quarter of 2009 compared with the previous quarter, according to national accounts estimates published by Eurostat, the Statistical Office of the European Communities.
 
In the same period, the number of people employed in the decreased by 0.6% (1 443 000 people). In the first quarter of 2009, employment declined by 0.7 per cent in the euro area and by 0.8 per cent in the EU27 . These figures are seasonally adjusted, Eurostat said.

Commenting on the economic outlook, European Economic and Monetary Affairs Commissioner Joaquín Almunia said: "The situation has improved – mainly due to the unprecedented amounts of money pumped into the economy by central banks and public authorities – but the weak economy will continue to take its toll on jobs and public finances".

"We need to continue implementing the recovery measures announced for this year and 2010 and accelerate the repair of the financial sector to make sure banks are ready to lend at reasonable terms when companies and households resume their investment plans. And we need to define a clear, credible and coordinated 'exit' strategy to put public finances progressively back on a sustainable path and to find the necessary resources to increase Europe's growth and jobs potential ," Almunia said.
 
The EC said that "tailwinds have gained strength during the summer, as the global economy has started to stabilise, partly as a result of strong policy interventions".
 
Helped by improved financial conditions, the fall in EU GDP slowed significantly in the second quarter (to ‑0.2 per cent quarter-on-quarter from ‑2.4 per cent in the first quarter of 2009).
 
"With the inventory cycle at a turning point and confidence improving in almost all sectors and countries, the near-term outlook is favourable," the EC said.
 
Based on these trends, growth projections for the second half of 2009 have been revised slightly upward in the EC forecast.
 
But because of downward revisions to the previous estimates for 2008 and the first quarter of 2009, the rate of the projected fall in GDP in 2009 as a whole remains unchanged at four per cent in both the EU and the euro area.
 
This is calculated on the basis of updated projections for France, Germany, Italy, the Netherlands, Poland, Spain and the United Kingdom, which together account for about 80 per cent of the EU’s GDP.

The global economy is no longer in freefall, the EC said.
 
"Recent data for trade and industrial production, as well as business and consumer confidence, are encouraging."
 
The EC said that emerging Asia appears to be leading the recovery, with growth in China remaining robust, while the contraction in the US has also levelled out.
 
The stimulus package and net exports are expected to allow the US to return to positive growth from the third quarter onwards, the EC said. Overall, the projected drop in world GDP in 2009 is halved in this update (from ‑1.4 per cent in the spring forecast to ‑0.7 per cent).
 
"But how sustainable the global recovery will be and what shape it will take are still highly uncertain," according to the EC.
 
The EC said that there were reasons to be "moderately optimistic" about the short-term outlook for Europe.
 
"Beyond the improved external outlook and more favourable financing conditions, both private and public consumption have held up well, while the inventory correction is advancing and high-frequency indicators point to a certain recovery in the coming quarters."

This is partly due, the EC said, to sizeable stimulus measures, some of which have yet to be implemented later this year, in several EU member states.
 
"However, the full impact of the crisis on labour markets and public finances is still to come, and the correction in housing markets continues to hold back construction investment in several countries. The recovery may therefore prove volatile and sub-par further down the line."
 
The rate of consumer-price inflation declined in the first half of 2009, reaching a trough of 0.2 per cent in July in the EU (and as low as ‑0.7 per cent in the euro area), pushed down mostly by the reversal of past hikes in energy and food prices.
 
"But with this effect coming to an end and commodity prices moving higher, the inflation rate is set to increase towards the end of the year," the EC said.
 
However, it said, there are no domestic inflationary pressures as there is still substantial slack in the economy and wage growth is expected to decelerate.
 
Taken together, the forecast for inflation remains unchanged from the spring forecast at 0.9 per cent in the EU in 2009 (and 0.4 per cent in the euro area).
 
The EC said that the risks to the growth outlook for 2009 "appear broadly balanced".
 
"On the downside, further adverse feedback loops between a slowly recovering real sector and a still fragile financial sector cannot be ruled out.
 
"On the upside, policy interventions may be more effective than expected in sustaining demand, improving sentiment and restoring the soundness of the financial sector," according to the EC.
 
The risks to the inflation outlook also appear largely balanced, the EC said.
 
"Higher commodity prices and improving economic conditions suggest some upside risks, balanced by considerable slack in the economy which may hold down inflation more than expected," according to the EC forecast.