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Euro Area in Recession
Press Release March 15, 2012
Since autumn 2011 the Euro Area is in recession. Annualized GDP declined by 0.3 percent in the fourth quarter and is expected to shrink further in the first quarter of 2012. Our assessment of the business cycle suggests that the recession will be mild. This view is based on the recent improvement of consumer and business confidence indicators as well as reduced financial market stress. However, weak domestic demand and the ongoing fiscal consolidation will lead only to a sluggish recovery starting in the second half of 2012.
During the last months inflation was again under pressure of increasing oil prices. The impact on inflation for the year 2012 as a whole is expect to be rather small because of negative base effects from the increases of energy prices in the beginning of the year 2011. In the light of the weak economic performance overall inflation is predicted to decline gradually during the year, but will remain above the 2 percent target of the European Central Bank on average.
Fiscal consolidation will have a strong negative impact on domestic demand during the forecast horizon. In addition to the countries already under fiscal surveillance Italy, Spain, and Belgium credibly announced the implementation of extra measures. Also France and the Netherlands plan to tighten their fiscal balance. However, in 1990’s many European countries underwent a phase of fiscal consolidation, which is comparable to the current situation to fulfill the Maastricht criteria. So we expect the fiscal impulse will not push the Euro Area as a whole into a deep recession.
The forecast is based on the assumption that the uncertainty linked to the current sovereign debt crises starts to vanish during the forecast horizon. Altogether, we expect Euro Area GDP to decrease by 0.2 percent in 2012. In the Euro Area without Germany the economic slump will be more pronounced so that GDP decreases by 0.6 percent. Overall inflation is forecast to be at 2.2 percent in 2012 and at 1.8 percent in the year 2013. Due to the modest economic recovery we expect a further deterioration of the Euro Area labor market. In 2012 the unemployment rate will rise to 10.9 percent. The ongoing fiscal consolidation efforts will lead to a decrease in the budget deficit in 2012 as well as in 2013.
Key Economic Data for the Euro Area, 2011–2013
| 2011 | 2012a | 2013a | |
|---|---|---|---|
| Real GDPb | 1.4 | –0.2 | 1.1 |
| without Germany | 0.9 | –0.6 | 0.9 |
| Consumer prices (HICP)b | 2.7 | 2.2 | 1.8 |
| Unemployment ratec | 10.2 | 10.9 | 11.2 |
| Budget balanced | –4.2 | –3.4 | –2.7 |
| aForecast. — bChange over previous year in percent. — cIn percent of labor force. — dRelative to nominal GDP. | |||
Summary of the Kiel Discussion Papers 502/503 by Jens Boysen-Hogrefe, Dominik Groll, Björn van Roye, Joachim Scheide and Tim Schwarzmüller „Euroraum in der Rezession“.
Contact: Tim Schwarzmüller