EU economy forecast to shrink 4% this year

Special Report:
Global Financial Crisis

BRUSSELS, May 4 (Xinhua) -- The economies of the European Union (EU) and the euro zone are both set to shrink by four percent this year and by a further 0.1 percent in 2010, the European Commission said on Monday.

"The European economy is in the midst of its deepest and most widespread recession in the post-war era," said Joaquin Almunia, EU Commissioner for Economic and Monetary Affairs.

It was sharply revised down from a January estimate, which forecast a contraction of 1.8 percent for the EU and 1.9 percent for the euro zone this year before positive growth for both areas next year.

The main factors behind the recession are the worsening of the global financial crisis, a sharp contraction in world trade and ongoing housing market corrections in some member states, the commission said.

Due to a weak economic outlook and an assumed decline in commodity prices, inflation in both the EU and the euro zone has fallen sharply in recent months and is projected to continue to do so during the second and third quarter of this year.

For the whole year of 2009, inflation is projected to be slightly lower than 1 percent in the EU and 0.5 percent in the euro zone, and to reach a trough in the third quarter in both regions. It is expected to gradually pick up to about 1.25 percent next year, still well below the 2 percent ceiling preferred by the European Central Bank (ECB) to maintain price stability.

But with the economies in a deeper recession, European labor markets are cooling. Employment is expected to contract by about 2.5 percent in both the EU and the euro zone this year and by a further 1.5 percent in 2010, resulting in about 8.5 million job losses for the two years, in contrast to the net job creation of 9.5 million from 2006 to 2008.

Unemployment is forecast to reach 10.9 percent in
the EU in 2010 and 11.5 percent in the euro zone.