The economic downturn in Europe will be twice as deep as previously forecast with unemployment reaching over 11 per cent, according to figures from the European Commission.
The EC’s analysts warned that the 16 euro-zone economies will shrink 4 per cent this year, a contraction that is double the level it estimated only four months ago.
Unemployment is expected to soar to 11.5 per cent by the end of next year. The commission has forecast that 8.5 million jobs will be lost across the 16 euro-zone countries by the end of 2010 with Ireland and Spain expected to record the highest rates of unemployment. The spike in unemployment all but wipes out the gains made between 2006 and 2008 when 9.5 million jobs were created.
However, it has expressed confidence that the end of the worst recession since the Second World War is near.
Despite the grim forecasts for 2009, the Commission stressed that the European economy is set to stabilise in 2010 when the rate of contraction is expected to slow to 0.1 per cent.
Joaquin Almunia, Commissioner for Economic and Monetary Affairs, said: “The European economy is in the midst of its deepest and most widespread recession in the post-war era. But the ambitious measures taken by the government and central banks in these exceptional circumstances are expected to put a floor under the fall in economic activity this year and enable a recovery next year.”
Mr Almunia told a press conference that despite the gloomy outlook, some encouraging economic signals have recently emerged. He pointed to improving financial markets and better business confidence figures. “We are no longer in free-fall,” he said.
The Commission said in January that it expected euro-zone economies to shrink 1.9 per cent this year but has now moved its outlook sharply lower to reflect the more pessimistic growth forecasts of the the International Monetary Fund and the Organization for Economic Cooperation and Development.
It now expects a small decline in 2010 compared to its January forecast of 0.4 per cent growth.
It has pencilled in a 4 per cent decline for the broader European Union, comprising 27 countries, in the current year.
The commission expects the region’s average budget deficit to widen to 5.3 per cent of output this year and 6.5 per cent in 2010, more than three times the gap recorded in 2008, and much higher than the 3 per cent European Union limit. Ireland is expected to report the largest budget deficit and only Finland, Cyprus and Luxembourg will record a budget deficit below the 3 per cent level this year.
The Commission expects inflation to slow to 0.4 per cent this year before accelerating to 1.2 per cent in 2010 which remains below its 2 per cent medium-term target. It described the risk of a deflation scenario as “limited”.