The short-term outlook for the Eurozone remains challenging with GDP growth expected to rise by only 1 percent in 2010 and 1.6 percent in 2011, according to Ernst & Young’s new quarterly Eurozone Forecast (EEF). According to the study, unemployment is set to continue to grow until the first half of 2011 to a peak of more than 17 million.
“We may be out of recession in the Eurozone but it is a very feeble recovery and the economy still faces significant headwinds compounded by the Greek financial crisis. While there are some bright spots we estimate that it will not be until mid 2012, and five years after the global downturn began, that the economy has staged a full recovery,” said Marie Diron, senior economic advisor to the E&Y.
The study reveals that recent events have highlighted the challenges faced by countries with weak fiscal positions – not only Greece, but also Portugal, Spain, Ireland and, to a lesser degree, Italy. As a result, there will be an opening of a North-South growth-divide, according to the forecast.
Even the Eurozone’s strongest economies such as France and Germany will be hampered by further cuts in employment levels. Although the forecast does not predict a rapid escalation in unemployment, the economy needs to grow significantly before productivity returns to pre-crisis levels and employment begins to recover.
A consequence of the Greek crisis for the Eurozone as a whole is that fiscal tightening will have to happen more quickly than previously intended. The report’s baseline forecast shows a significant reduction in deficits, from nearly 7 percent of GDP on average across the Eurozone in 2010, to less than 3 percent of GDP by 2014. The quarterly economic forecast is based upon the European Central Bank’s own forecast model and is uniquely placed to offer insight into macro economic trends across the Eurozone as well as in the 16 countries.