New European economic forecasts The ever-receding recovery

A WEEK after official figures showed a steep fall in euro-zone output in late 2012 the European Commission (EC) has added to the gloom by unveiling some gloomy forecasts for 2013. Three months ago the EC envisaged a modest recovery getting under way in the first half of this year. Now that is not expected until the second half of 2013.

The lower starting-point for GDP and the delay in the recovery mean that the picture for 2013 as a whole now looks bleaker. Last November the EC expected the euro area to grow this year though barely, by just 0.1%, following a 0.4% decline in 2012; now it is expecting a fall in GDP of 0.3% following a 0.6% drop last year.

This year’s prospects for southern Europe have generally darkened. The EC now expects the Portuguese economy to contract by 1.9% compared with its November forecast of a 1% fall. The outlook in Italy has also deteriorated, with a decline of 1% now expected rather than one of 0.5%. The projection for Spain, of a 1.4% fall, has been left unchanged.

Evidence that the euro area continues to shrink came yesterday from Markit, a research firm, in a survey showing that activity in the services and manufacturing sectors of the euro area had fallen at a faster pace in February than January. According to this preliminary estimate, the index recorded 47.3 this month, down from 48.6. A level below 50 is consistent with a contracting economy.

The beacon of light in the EC’s forecast for 2013 is a positive performance by Germany, the euro area’s biggest economy, as it shrugs off the sharp decline in output in the final three months of last year. Even so the EC now expects the German economy to grow by only 0.5% (compared with 0.8% last November). A rebound does seem to be on the way. Today’s Ifo business-climate survey, which combines assessments of the current situation and six-month ahead expectations, rose in February for the fourth month running, from 104.3 in January to 107.4. That was well ahead of market predictions and the increase was the biggest since July 2010.

But will German resilience be sufficient to pull the rest of the euro area out of the trough? One concern is that the rot has spread from the periphery to the core, in particular to France, the zone’s second biggest economy. The EC expects that French GDP will inch forward by just 0.1% this year after stagnating in 2012; in November it had forecast growth of 0.4% in 2013, following a 0.2% rise last year.

The other gnawing worry is whether public tolerance of economic misery in southern Europe will snap prompting a political rejection of the harsh austerity and unpalatable structural reforms being undertaken to satisfy German demands for keeping the single-currency zone together.  Even if this weekend’s Italian elections deliver a workable government, rising unemployment will limit its freedom of manoeuvre. The Italian jobless rate, which stood at 8.4% in 2011, is forecast to reach 11.6% this year and to carry on rising in 2014 to 12%. The position is even worse in other parts of southern Europe: in Spain it will rise from 25% last year to 26.9% in 2013 and in Portugal from 15.7% to 17.3%. Such grievously high unemployment rates are a political threat to the viability of the euro zone as well as a social tragedy.