Euro zone economy to shrink again in 2013, EU says

BRUSSELS Fri Feb 22, 2013 7:47pm IST

1 of 2. European Economic and Monetary Affairs Commissioner Olli Rehn presents the EU Commission's interim economic forecast during a news conference at the EU Commission headquarters in Brussels February 22, 2013.

Credit: Reuters/Francois Lenoir

BRUSSELS (Reuters) - The euro zone will not return to growth until 2014, the European Commission said on Friday, reversing its prediction for an end to recession this year and blaming a lack of bank lending and record joblessness for delaying the recovery.

The 17-nation bloc's economy, which generates nearly a fifth of global output, will shrink 0.3 percent in 2013, the Commission said, meaning the euro zone will remain in its second recession since 2009 for a year longer than originally foreseen.

The Commission, the EU executive, late last year forecast 0.1 percent growth in the euro zone's economy for 2012, but now says tight lending conditions for companies and households, job cuts and frozen investment have delayed an expected recovery.

The Commission sees the euro zone economy growing 1.4 percent in 2014, with a figure of -0.6 percent for 2012.

"The improved financial market situation contrasts with the absence of credit growth and the weakness of the near-term outlook for economic activity," said Marco Buti, the commission's director-general for economic and monetary affairs. "The labor market... is a serious concern," he said, in a preamble to the Commission's latest forecasts.

The European Central Bank's promise last year to do what it takes to defend its common currency has removed the risk of a break-up of the euro zone, and member countries' borrowing costs have come down from unsustainable levels.

But the damage from the 2008/2009 global financial crisis and the ensuing euro zone debt crisis has been greater than expected on the real economy, with global demand for euro zone exports one of the few saviors in terms of generating growth.

Joblessness in the euro zone is set to peak at 12.2 percent, or more than 19 million people, in 2013, the Commission said, and both private and public consumption will not make any contribution to improving output, instead dragging on the economy.

The outlook raises the prospect of further interest rate cuts by the ECB to jump-start the economy by reducing the cost of lending for companies and families, although with banks reluctant to lend, any impact may be muted.

Consumer inflation is forecast by the Commission to be 1.8 percent for 2013, and with such pressures contained the ECB may feel more comfortable cutting rates to below the current 0.75 percent level.

"A cut in the main refinancing rate is not the most powerful measure the ECB could implement, but it is a step in the right direction," investment bank JP Morgan wrote in a note this week.

The Commission's overall view is a touch more pessimistic than that of the International Monetary Fund, which sees a 0.2 percent euro zone contraction this year.

The ECB previously cut its estimate of euro zone gross domestic product (GDP) for next year to between a fall of 0.9 percent and growth of just 0.3 percent.

"A weaker-than-expected final quarter of 2012 is set to shift the inception of the recovery towards mid-2013," the Commission said.

(Reporting by Robin Emmott; editing by Rex Merrifield)

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