While I watch the news feeds out of Greece as the parliament votes on the future of … well … just about everything, I am once again reminded how highly optimistic and misguided economic assumptions have led, in part, to the situation we now see across Europe. One of the places where you can witness the historical record of this is in the European Commissions economic forecasts which are available here.
Overnight the EC released its latest forecast on Europe’s economy which contained some large revisions to previously forecast data:
The short-term outlook for the EU economy remains fragile, but a gradual return to GDP growth is projected for 2013, with further strengthening in 2014.
On an annual basis, GDP is set to contract by 0.3% in the EU and 0.4% in the euro area in 2012. GDP growth for 2013 is projected at 0.4% in the EU and 0.1% in the euro area. Unemployment in the EU is expected to remain very high.
The large internal and external imbalances that built up in the pre-crisis years are being reduced, but this process continues to weigh on domestic demand in some countries, and economic activity diverges significantly across Member States. At the same time, competitiveness lost in the first decade of EMU in some Member States is being gradually restored, so that export growth is projected to increase progressively as global trade starts reaccelerating. Further progress in consolidating public finances is underpinning this rebalancing process.
The structural reforms undertaken should begin to bear fruit over the forecast period, while advancements in the EMU architecture continue to strengthen confidence. This should pave the way for a stronger and more evenly distributed expansion in 2014. GDP growth in 2014 is projected at 1.6% in the EU and 1.4% in the euro area.
Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro said: “Europe is going through a difficult process of macroeconomic rebalancing, which will still last for some time. Our projections point to a gradual improvement in Europe’s growth outlook from early next year. Major policy decisions have laid the foundations for strengthening confidence. Market stress has been reduced, but there is no room for complacency. Europe must continue to combine sound fiscal policies with structural reforms to create the conditions for sustainable growth to bring unemployment down from the current unacceptably high levels.”
Having read that you may well be wondering exactly where the growth is going to come from in late 2013 which will make 2014 a year of economic recovery. To answer that you need to go back and read some of the previous forecasts
On an annual basis, GDP is set to contract by 0.3% in the EU and 0.4% in the euro area in 2012. GDP growth for 2013 is projected at 0.4% in the EU and 0.1% in the euro area. Unemployment in the EU is expected to remain very high
Government deficits are expected to fall to 3.6% in the EU and 3.3% in the euro area in 2012. The available information from budgets for 2013 points to continued, though somewhat slower, consolidation with headline government deficits projected at 3.2% of GDP in the EU and 2.6% in the euro area. This is also reflected in the structural improvements of the budget balance, which in the EU is expected at 1.1pp of GDP in 2012 and 0.7pp in 2013, and in the euro area at 1.3pp and 0.9pp, respectively. General government debt in 2012 stands at 93% in the euro area and at 87% of GDP in the EU. For 2013, it is projected to rise to 95% of GDP in the euro area and 89% in the EU, but to stabilise thereafter.
Forecasts from 6 months ago:
For 2012, with real GDP projected to stagnate in the EU and to contract by -0.3% in the euro area. For 2013, growth is forecast at 1.3% in the EU and 1.0% in the euro area.
In line with the slowdown in economic activity, employment is projected to contract by 0.2% in the EU (0.5% in the euro area) in 2012. The expected return of growth should lead to a gradual improvement of labour markets in 2013, which will in turn contribute to a more sustained recovery. Unemployment is expected to remain at a level of 10.3% in the EU over the forecast horizon and 11% in 2013 the euro area.
On the back of already decided consolidation combined with a gradual economic recovery later over the forecast horizon, budget deficits are expected to continue declining from 4.5% of GDP in the EU (4.1% in the euro area) in 2011 to 3.6% in the EU (3.2% euro area) in 2012 and further to 3.3% (2.9%) in 2013, with large differences among Member States. However, the assumption of unchanged policies implies that for the EU almost no structural improvement could be included in the forecast for 2013. The increase of debt-to- GDP ratios is forecast to slow down and to reach 87.2% of GDP in the EU (92.6% in the euro area) by 2013.
And from 12 months ago:
Expected GDP growth is revised down for the second half of this year as well as for 2012; for 2013, a return of modest growth is projected. Mostly due to the strong GDP growth in the first quarter of this year, annual GDP growth for 2011 remains close to the values projected in the spring forecast, at 1.6% in the EU and 1.5% in the euro area. Growth for 2012 is revised down substantially, by 11⁄4 percentage points to 1⁄2% in both the EU the euro area. For 2013, annual growth is projected at 1.5% in the EU and 1.4% in the euro area.
Fiscal deficit outcomes for 2011 are now projected at 4.7% of GDP in the EU and 4.1% in the euro area. The slight improvement compared to the spring forecast for the euro area is mainly due to additional fiscal measures in some Member States. Deficits are forecast to decrease further, albeit at a slowing pace, due to both reduced expenditure and higher revenues. For 2012, deficits are projected at 3.9% in the EU and 3.4% in the euro area. The EU’s gross debt ratio is forecast to reach a peak of about 85% of GDP in 2012 and to stabilise in 2013. In the euro area, gross public debt is projected to rise over the whole forecast horizon, albeit at decreasing pace compared to the 2008- 10 period, breaching 90% already in 2012.
the unemployment rate is expected to remain mainly unchanged over the forecast horizon. Employment in the EU and the euro area is likely to be stuck below levels reached before the 2008-09 recession. With this deteriorated economic outlook, the net effect of job creation and job destruction will depend on the capacity of firms to adjust labour costs either through wages or hours worked as well as on the reallocation needs within the economy and the prevailing policy context.
So as you can see, the European Commission has a history of making overly optimistic forecasts based on faulty assumptions but amazingly always predict thateverything will start getting better in 12 months when “confidence” returns.
Obviously I tend to take their assessments with a pinch of salt but what is concerning is that even with their history they are now only predicting GDP growth for 2013 of 0.4% in the EU and 0.1% in the EZ. If that’s the optimistic high-side then 2013 is looking very ugly indeed.
At time of typing Greece still hasn’t voted so I’ll post on the outcome later today. We’ve also got an ECB meeting tonight with an associated press conference. As usual I’ll be watching out for the Q&A afterwards and expect the international press to give Mario Draghi another grilling on the OMT and Spanish collateral.