EU issues downbeat outlook as growth stalls

GROWTH has stalled, the recovery evident earlier this year has halted and the risks for the future are high, the EU warned in its half-year review.

The gloomy report should concentrate the minds of finance ministers heading to Poland for a two-day meeting beginning today, which will also be attended by the US treasury secretary Timothy Geithner.

While growth is expected to come to a standstill at year-end amid the continuing financial crisis, there will not be a double-dip recession, the EU’s Economic Affairs Commissioner Olli Rehn said.

Debt levels were increasing in some countries despite action. For the programme countries, including Ireland, he advised they take additional measure to restore confidence if required. He would not say what action Ireland should take.

Thanks to the stronger than expected growth in the first quarter of the year, annual growth is forecast at 1.6% in the euro area and 1.7% in the EU, much the same as in the spring forecast, but has been revised down about a quarter percentage point.

Consumer and business sentiment has weakened and domestic demand has dropped, with exports taking over as the main driver of growth everywhere.

“Recovery from financial crisis is often slow and bumpy. The EU economy is affected by a more difficult external environment, while domestic demand remains subdued.

“The sovereign debt crisis has worsened and the financial market turmoil is set to dampen the real economy,” he said.

Should global growth be better than expected, EU exports would benefit more than expected, while a drop in oil prices could bring real improvements to incomes and consumers. Inflation pressures have abated having peaked in the second quarter of the year, but inflation is set to remain fairly high in the second half of the year at around 2.5% and 2.9% for the EU and euro area.

Feeble labour market conditions kept wage growth at a moderate pace in the euro area in the first quarter, the report said but the year-long fall in annual unit labour costs seems to have halted, reflecting an increase in compensation per employee equal to productivity gains.

Generally labour market conditions have been improving with the number of hours being worked picking up. Since last autumn the numbers employed have also increased by 0.5% in the EU and 0.3% in the euro area in the first quarter of this year.

Unemployment too has been almost stable this year remaining at around 10% in the euro area, just marginally lower than a year ago.

The report notes prospects for improvements this year have waned.