European Economic Forecast - Autumn 2011 EUROPEAN ECONOMY 6|2011 EUROPEAN COMMISSION The European Economy series contains important reports and communications from the Commission to the Council and the Parliament on the economic situation and developments, such as the European economic forecasts and the Public finances in EMU report. Unless otherwise indicated the texts are published under the responsibility of the Directorate-General for Economic and Financial Affairs of the European Commission, BU-1 3/76, B-1049 Brussels, to which enquiries other than those related to sales and subscriptions should be addressed. Legal notice Neither the European Commission nor any person acting on its behalf may be held responsible for the use which may be made of the information contained in this publication, or for any errors which, despite careful preparation and checking, may appear. More information on the European Union is available on the Internet (http://europa.eu). ISBN 978-92-79-19317-0 doi: 10.2765/15525 © European Union, 2011 Reproduction is authorised provided the source is acknowledged. European Commission Directorate-General for Economic and Financial Affairs COMMISSION STAFF WORKING DOCUMENT European Economic Forecast Autumn 2011 EUROPEAN ECONOMY 6/2011 CONTENTS i Overview 1 PART I: Economic developments at the aggregated level 7 1. The EU economy: A recovery in distress 9 1.1. Overview 9 1.2. Putting the forecast into perspective 11 1.3. The external environment 18 1.4. Financial markets in Europe 23 1.5. The EU economy 28 1.6. Risks 54 2. Post-recession labour market patterns in the EU 58 2.1. Introduction 58 2.2. Setting the scene: Employment prospects and unemployment developments 58 2.3. Factors driving labour market developments 63 2.4. Has the labour matching process deteriorated? 67 2.5. Trend and determinants of structural unemployment in the aftermath of the recession 69 2.6. Overall assessment 76 PART II: Prospects by individual economy 79 Member States 81 1. Belgium: Growth slowdown amidst weaker global growth and new bank worries 82 2. Bulgaria: Moderate growth amid rising uncertainty 85 3. The Czech Republic: Soft patch in 2012 followed by moderate recovery 88 4. Denmark: A modest recovery 91 5. Germany: Growth momentum temporarily halted by uncertainty 94 6. Estonia: Reviving domestic demand is balancing growth 98 7. Ireland: Export-driven recovery weighed by continuing household deleveraging and fiscal consolidation 101 8. Greece: Painful adjustment 105 9. Spain: Unwinding imbalances in a weakening external environment 108 10. France: Domestic growth weakened by global risks and declining confidence 112 11. Italy: Subdued growth ahead 116 12. Cyprus: Subdued growth prospects while fiscal challenges persist 120 13. Latvia: Growth exceeds expectations in 2011 but outlook for 2012 worsens 123 14. Lithuania: Strong recovery to dampen in line with global trends 126 15. Luxembourg: Uncertain times ahead for a large financial centre 129 16. Hungary: Bumpy ride ahead 131 17. Malta: Global uncertainty hits domestic demand 135 18. The Netherlands: Moderate growth hinging on external demand 138 19. Austria: Recovery losing pace 141 20. Poland: Progressing despite adverse global economic conditions 144 ii 21. Portugal: Strong fiscal consolidation efforts in a challenging environment 147 22. Romania: Recovery to continue despite worsening external environment 150 23. Slovenia: Prospects depend on stabilisation of construction 154 24. Slovakia: Growth slowdown ahead 157 25. Finland: Economic recovery slowing but public finances stable 160 26. Sweden: Growth to decelerate amid rising uncertainty 163 27. The United Kingdom: The pause in growth risks becoming prolonged 166 Candidate Countries 171 28. Croatia: Subdued economic activity in the near term 172 29. The former Yugoslav Republic of Macedonia: Catching up, albeit with question marks 175 30. Iceland: Uncertainties persist amid a tentative recovery 177 31. Montenegro: A dilemma of growth and sluggish credit 180 32. Turkey: Riding the tides of the slowdown 182 Other non-EU Countries 185 33. The United States of America: Slowing growth amid greater uncertainty and fiscal consolidation 186 34. Japan: Strong rebound in the short run but fading prospects 189 35. China: Growth is slowing down 192 36. EFTA: The outlook deteriorates 195 37. Russian Federation: The recovery stutters 198 Statistical Annex 203 LIST OF TABLES I.1.1. Overview - the autumn 2011 forecast 10 I.1.2. International environment 18 I.1.3. Main features of the autumn 2011 forecast - EU 29 I.1.4. Main features of the autumn 2011 forecast - euro area 30 I.1.5. Composition of growth - EU 33 I.1.6. Composition of growth - euro area 34 I.1.7. Labour market outlook - euro area and EU 43 I.1.8. Inflation outlook - euro area and EU 46 I.1.9. General government net lending and EDP deadlines 50 I.1.10. Euro-area debt dynamics 54 I.2.1. Key labour market indicators by Member State 59 I.2.2. Sectoral employment growth 59 I.2.3. Recent NAWRU developments across EU countries 70 I.2.4. Results of panel regression, with NAWRU as the dependent variable 71 iii LIST OF GRAPHS I.1.1. Real GDP, EU 9 I.1.2. HICP, EU 10 I.1.3. iTraxx - default risk, financials and overall 11 I.1.4. Stock market indices, selected euro-area Member States 12 I.1.5. Sovereign bond spreads, selected euro-area Member States 12 I.1.6. Sovereign bond spreads and Economic Sentiment Indicator, euro area 13 I.1.7. Employment expectations, DG ECFIN surveys, euro area 13 I.1.8. Interbank market spreads 13 I.1.9. Net tightening of credit standards, loans to non-financial corporations 14 I.1.10. Impact of economic outlook on credit standards for enterprises 14 I.1.11. Consensus forecast (mean) for real GDP growth in 2011 and 2012 15 I.1.12. World trade and Global PMI manufacturing output 18 I.1.13a. The decline in world trade in 2008-09 19 I.1.13b. The rebound in world trade in 2009-11 19 I.1.14. Commodity-price developments 20 I.1.15. Food and agricultural non-food prices 20 I.1.16a. GDP per capita, advanced economies 21 I.1.16b. GDP per capita, emerging and developing economies 21 I.1.17. Real GDP growth in advanced and emerging economies 22 I.1.18. Government-bond yields, seleted euro-area Member States 23 I.1.19. Central bank balance sheets, euro area, UK and US (weekly data) 24 I.1.20. Corporate spreads over euro-area sovereign benchmark bonds (5-year maturity) 24 I.1.21. Stock-market indices, euro area 24 I.1.22. Interbank market spreads 25 I.1.23. Policy interest rates, euro area, UK and US 25 I.1.24. Bank lending to households and non-financial corporations, euro area 27 I.1.25. Loans to NFI relative to GDP 27 I.1.26. Comparison of recoveries, current against past average - GDP, euro area 28 I.1.27. Real GDP growth, EU and euro area, semi-annual growth rates 28 I.1.28. Industrial new orders and industrial production, EU 29 I.1.29. Economic Sentiment Indicator and PMI composite index, EU 30 I.1.30. Economic Sentiment Indicator (ESI) and components - October 2011, difference from long-term average 30 I.1.31. Real GDP, euro area 31 I.1.32. GDP growth and its components, EU 32 I.1.33. Real GDP growth, Member States, 2008-13 33 I.1.34. Real GDP growth , EU, contributions by Member States 33 I.1.35. PMI manufacturing output, Member States 34 I.1.36. A multi-speed recovery in the EU - real GDP, annual growth (unweighted) 35 I.1.37. Private consumption and consumer confidence, euro area 35 I.1.38. Retail trade volumes and retail confidence, euro area 36 iv I.1.39. Expected major purchases over the next year and car registrations, EU 36 I.1.40. Gross fixed capital formation, euro area, US and the UK 38 I.1.41. Equipment investment and capacity utilisation, euro area 39 I.1.42. Profit growth, EU and euro area 39 I.1.43. Housing investment and building permits, euro area 40 I.1.44. Global demand, euro-area exports and new export orders 40 I.1.45. Current-account balances, euro-area Member States 42 I.1.46. Cumulative current-account balances of deficit and surplus, euro-area Member States 42 I.1.47. Employment growth and unemploment rate, EU 43 I.1.48. Employment expectations, DG ECFIN surveys, euro area 44 I.1.49. Unemployment rates across euro-area population 45 I.1.50. Industrial producer prices, euro area 46 I.1.51. PMI manufacturing input prices and output prices, EU 47 I.1.52. HICP, euro area 47 I.1.53. Inflation breakdown, EU 48 I.1.54. Inflation expectations, euro area 48 I.1.55. Inflation dispersion of EA Member States - HICP inflation rates 49 I.1.56. Contribution of energy inflation to headline inflation (Q1- 2011 - Q3-2011) 49 I.1.57. HICP inflation across euro-area population 50 I.1.58. General government revenues and expenditure, EU 51 I.1.59. Budgetary developments, euro area 51 I.1.60. Medium-term public debt projections in the EU 54 I.1.61. GDP forecasts , euro area - Uncertainty linked to the balance of risks 55 I.2.1. Employment and GDP growth in the EU 58 I.2.2. GDP and employment in the EU Member States: cumulated changes between Q2-2009 and Q2-2011 60 I.2.3. Unemployment rates in the EU 60 I.2.4. Cumulative changes in GDP, number of employees and hours per worker 63 I.2.5. Phillips curve for the euro area 2000-10: growth of negotiated wages 64 I.2.6. Phillips curve for the euro area 2000-10: growth of compensation per employee 64 I.2.7. Real wage growth, euro area 65 I.2.8. Job finding and separation rates in the EU 66 I.2.9. Job finding rates – the probability of leaving unemployment has fallen during the crisis and remains low in many Member States 66 I.2.10. Job separation rates - the probability of losing a job remains high in many Member States 67 I.2.11. Beveridge curve for the EU 2000Q1-2011Q3 69 I.2.12. Shifts in the euro-area Beveridge curve and NAWRU (cumulated changes since 1996) 69 I.2.13. EU15 NAWRU developments (1967-2012) 70 I.2.14. NAWRU developments in selected countries 71 I.2.15. NAWRU and fit based on a panel regression 1970-2008 72 I.2.16. Alternative fit for selected countries, Spain 74 I.2.17. Alternative fit for selected countries, Ireland 74 v LIST OF BOXES I.1.1. Bank balance-sheet adjustment and credit supply 16 I.1.2. Are capital flows to Central- and Eastern European Member States at risk? 26 I.1.3. Fiscal consolidation, confidence and the economic outlook. 52 I.1.4. Some technical elements behind the forecast 56 I.2.1. The German labour market during the recession 61 I.2.2. The effect of skill mismatches on unemployment 68 I.2.3. The role of a housing market shock 73 I.2.4. Demand and supply factors driving the Spanish employment rate 75 LIST OF MAPS I.1.1. Labour market developments in the EU Member States, change in unemployment rates between 2005 and 2011 45 [...]... slowing economic activity, HICP inflation is forecast to decline over the forecast horizon (see Graph I.1.2) The balance of risks is predominantly on the downside, whereas risks to the inflation outlook are balanced Table I.1.1: Overview - the autumn 2011 forecast Real GDP 2010 Autumn 2011 forecast 2011 2012 2013 Spring 2011 forecast 2011 2012 Inflation 2010 Autumn 2011 forecast 2011 2012 2013 Spring 2011. .. Table I.1.2: International environment Autumn 2011 forecast 2011 2012 (Annual percentage change) (a) 2008 2009 2010 2013 Spring 2011 forecast 2011 2012 Real GDP growth USA Japan Asia (excl Japan) - China - India Latin America - Brazil MENA CIS - Russia Sub-Saharan Africa Candidate Countries World (incl EU) 19.9 -0 .4 -3 .5 3.0 1.6 1.5 1.3 2.6 2.7 5.9 -1 .2 -6 .3 4.0 -0 .4 1.8 1.0 0.5 1.6 27.6 6.9 6.4 9.1... 3.6 -1 1.0 13.7 8.4 6.2 6.7 8.2 8.2 (a) Relative weights in %, based on GDP (at constant prices and PPS) in 2010 18 Economic developments at the aggregated level Graph I.1.13a: The decline in world trade in 200 8-0 9 May-09 Apr-09 Mar-09 Apr-08 110 100 90 80 70 60 50 May-08 Jun-08 Jul-08 Feb-09 Graph I.1.13b: The rebound in world trade in 200 9-1 1 Jun-09 Aug-11 110 Jun-11 100 90 80 Apr-11 70 60 50 Feb-11... 352, September 2011 See C M Reinhart and K S Rogoff, A decade of debt, Policy Analyses in International Economics 95, Peterson Institute for International Economics, September 2011 (particularly Section IV) 11 European Economic Forecast, Autumn 2011 Graph I.1.4: Stock market indices, selected euro-area Member States 110 index, 1st half of 2011= 100 100 90 80 70 60 Jan-11 Apr-11 Jul-11 Oct-11 Italy, MIB... Real GDP, EU 5.5 q-o-q% 4.5 3.2 3.5 2.5 1.5 0.3 2.0 3.3 index, 2005=100 1.5 110 0.6 1.6 105 -4 .2 2.0 forecast 100 0.5 -0 .5 95 -1 .5 -2 .5 90 05 06 07 08 09 10 11 12 13 GDP growth rate (lhs) GDP (quarterly), index (rhs) GDP (annual), index (rhs) Figures above horizontal bars are annual growth rates 9 European Economic Forecast, Autumn 2011 At the current juncture there is evidence that the economic recovery... once in full swing, is difficult to stop Graph I.1.11: Consensus forecast (mean) for real GDP growth in 2011 and 2012 2.5 y-o-y% forecast for 2012 2.0 1.5 1.0 forecast for 2011 0.5 Jan-11 Jul- 11 Euro area Jan-11 Jul-11 EU Recent evidence from the EU economy suggests that the risk of more and stronger adverse feedback loops is substantial Economic history is only of limited help in assessing the risks... 60 50 Feb-11 Aug-09 Oct-09 Dec-09 Aug-08 Jan-09 Sep-08 Dec-08 index, Apr 2008=100 Oct-08 Nov-08 size of the change could be rather limited at the current juncture, in particular as the disruptions in the aftermath of natural disasters in Japan had a non-negligible impact on underlying national PMIs Further out, several growth drags in 2011 will exert only a temporary impact, provided economic growth... 4 30 2 40 0 50 -2 60 -4 70 Jan-11 Apr-11 Jul-11 Oct-11 Employment exp in industry sector, next 3-months (lhs) Employment exp in services sector, next 3-moths (lhs) Consumers' unempl exp., next 12-months (inverted, rhs) Graph I.1.8: Interbank market spreads 90 bps 80 70 60 50 40 30 20 10 0 • Worsening financing conditions resulting from financial market strains form another threat to economic growth... public finances: an assessment of selected EU countries using SYMBOL, OECD Financial Market Trends, 2011, No 2 For an in-depth analysis of the links between fiscal consolidation and economic growth see European Economy Forecast – Autumn Forecast 2010, European Economy, 2010, No 7, pp 3 1-4 7 (chapter I.2) Economic developments at the aggregated level public finances This could further raise doubts about... 2.7 1.6 3.2 1.9 2.2 2.5 1.5 4.0 -0 .4 1.8 1.0 0.5 1.6 -0 .7 -0 .2 -0 .1 0.8 0.2 0.3 10.3 9.2 8.6 8.2 9.3 9.0 3.3 : : : : : 5.0 3.7 3.5 3.6 4.0 4.1 : : : : : : Economic developments at the aggregated level 1.2 PUTTING THE PERSPECTIVE FORECAST INTO In 2011 the economic and financial crisis has entered a new phase as increased turmoil in financial markets, including sovereign-bond markets in some Member States, . European Economic Forecast - Autumn 2011 EUROPEAN ECONOMY 6 |2011 EUROPEAN COMMISSION The European Economy series contains. WORKING DOCUMENT European Economic Forecast Autumn 2011 EUROPEAN ECONOMY 6 /2011 CONTENTS i Overview 1 PART I: Economic developments