Yesterday, the European Commission's Directorate-General for Economic and Financial Affairs released its Spring 2009 Economic Forecast. Against the backdrop of the "deepest and most widespread recession in the post-war era," fragile investor confidence, and the collapse of "global trade and industrial production," the EC expects EU and euro-area GDP to contract by 4% in 2009, double the EC's earlier interim forecast of a 2% contraction. As fiscal and monetary stimulus measures gain traction, and investor confidence improves, the EC forecasts the decline in GDP to "level off" and "turn positive" towards the end of 2009, with global growth expected to reach 2% in 2010. Among the five largest EU economies, real GDP is expected to contract this year by about 5½% in Germany, 4-4½% in Italy and the United Kingdom and by about 3% in France and Spain. Activity is expected to broadly stabilize in all of the larger economies in 2010, except Spain where a further contraction of close to 1% is predicted.
Although government consumption and public investment will contribute positively to growth, the EC identified the following four downside risks that contribute to "considerable uncertainty":
- De-leveraging may cause further disruptions in the flow of foreign capital which can, in turn, further depress domestic economic and financial conditions;
- The rapid collapse of world trade and industrial production has raised the risk of protectionist measures being implemented in both advanced economies and emerging markets;
- Disruptive exchange-rate developments in the foreign currency markets; and
- Weak economic sentiment may continue for some time, particularly with unemployment on the rise, including potential social and political unrest, particularly in deteriorating labor markets in emerging market economies and lower-income countries.