EU lifts 2010 growth forecast

[November 03, 2009]  BRUSSELS (AP) -- The European Commission on Tuesday predicted that the EU and eurozone will grow in 2010 at a modest rate of 0.7 percent as the economy moves from a sharp recession to a hesitant and fragile recovery.

The growth forecast was raised from the earlier outlook that the economies would shrink 0.1 percent in 2010.

The EU executive warned however that a "better-than-expected" rebound in the second half of 2009 would likely be followed by slower growth early next year.

High unemployment and the lingering effects of the financial crisis are expected to dampen demand.

The EU sees stronger growth in 2011, predicting that the eurozone would expand by 1.5 percent and the EU by 1.6 percent. It says EU governments should start exit strategies to withdraw economy stimulus programs in 2011.

EU Economy Commissioner Joaquin Almunia warned that the euro would stay at a high value against the dollar over the next two years -- which may hold back European exports to the U.S. and other nations by increasing the dollar price of German cars or French champagne.

"We think that the U.S.-euro exchange rate will be on average $1.48 for next year and 2011," he told reporters.

The euro rose to a 14-month high of $1.5061 in spot trading on Oct. 26, according to Thomson Reuters data.

The EU and eurozone likely exited recession in the third quarter of 2009, the EU said, after five consecutive quarters of negative growth. The first official third quarter figures will be published on Nov. 13.

It warned that the upturn is "largely driven by temporary factors" as companies restock after a spending freeze and governments spend billions of euros on stimulus programs to stoke growth.

High unemployment and financial deleveraging -- as companies struggle to pay off large debt loads -- will likely hold back growth in the longer-term, it said, as households and businesses have less disposable cash.

"The banking sector is still fragile and the credit sector is stagnating and this is the bad news," Almunia said. "Credit flows are close to zero or in some cases in negative territory."

He blames weak demand from potential borrowers and constraints on bank lending as some financial institutions find it difficult to secure funding on wholesale markets. Banks are also focussed on repairing balance sheets badly hit by huge losses when complex securities slid in value last year.

Almunia called on government to push on with programs to buy up or guarantee these shaky assets to allow banks restore credit flows.

He said that "without normal credit flows, we will not have a sustained recovery."

The EU did not change its estimate for the economy of the 16 nations that use the euro to contract by 4 percent this year. It downgraded the figure for the economy of the entire 27-nation European Union to shrink by 4.1 percent in 2009, from an earlier estimate of 4 percent.

Poland is the only EU nation that will report economic growth in 2009, the EU said. Eight countries will keep shrinking in 2010 -- eurozone members Spain, Ireland and Greece and non-euro nations Bulgaria, Estonia, Latvia, Lithuania and Hungary. All 27 nations should grow in 2011.

The EU was less pessimistic in this forecast about how high the jobless rate would rise. It earlier predicted that the eurozone rate would rise to a postwar record of 11.5 percent in 2010 but now sees the rate increasing from 9.5 percent this year to 10.7 percent next year.

Inflation will also remain low for the next two years, it said, staying well below the European Central Bank guideline of just under 2 percent. This may sap the case for raising rates from an all-time low of 1 percent in the eurozone.

The commission sees eurozone inflation at 0.3 percent in 2009, rising to 1.1 percent in 2010 and 1.5 percent in 2011.

The cost of bailing out banks, boosting the economy and spending far more on welfare payments to the growing number of the unemployed has loaded European governments with debt as tax revenue collapses. The EU said nations would risk long-term sustainability if they continued to run large budget gaps for several years running, while their populations age, with fewer workers paying for the growing costs of health care and social security.

Collectively, euro area debt is set to rise from 78.2 percent this year to 88.2 percent in 2011, it said -- far above a 60 percent limit that EU budget rules set for each euro member to underpin their currency. Only four of the 16 countries would stick to that limit in 2011.

Public debt in euro members Greece, Ireland and Spain is set to soar rapidly, with Greece next year overtaking Italy as running the highest level in the EU at 124.9 percent of gross domestic product in 2010.

[Associated Press; By AOIFE WHITE]

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