EU Commission Projecting Sub-Potential Growth In 2009-10
November 4, 2008
The EU Commission released new semi-annual growth forecasts yesterday that are both pessimistic and overly optimistic. Quarter-on-quarter non-annualized forecasts are provided out to the final quarter of 2010. The forecast for growth in the euro area envisages only three negative quarters, those being the final three quarters of 2008. The worst quarter in the forecast, 2Q08, already lies in the rear-view mirror, which is a highly implausible assumption. However, in none of the subsequent ten quarters to 4Q10 does growth exceed 0.3% (that is, about 1.2% saar), and the annual 2009 and 2010 growth estimates work out to just 0.1% and 0.9%, respectively. From being slightly more than 1% greater than potential GDP, actual GDP is estimated to sink to around 1.4% below potential, which is enough to reduce inflation near to the ECB’s definition of price stability. Europe will be lucky to avoid a negative quarter in 2009, especially since full-year growth is projected at zero that year in Germany, Italy, and France and at -0.2% in Spain and -0.9% in Ireland, which have been hit by property busts.
The EU has also made growth assumptions for Britain, the United States, and Japan. Negative U.K. growth is projected for four straight quarters, starting in 3Q08. The deepest red-ink figure (-0.4%) lands during the present quarter. Full-year growth is forecast at -1.0% next year and just +0.4% in 2010. Negative growth is projected in the United States covering the same four consecutive quarters as in the British forecast. But the worst quarter, 4Q08, shows GDP only dropping about 1.5% saar, which is not bearish enough. Japan emerges from negative growth one quarter sooner than the United States or Britain, but its revival is very shallow. Not one of the ten quarters after mid-2008 puts Japanese growth even as high as 1.0% saar, and the expansion rate in Euroland, the United States, and Britain get as high as 2.0% saar in no quarter during this period. The forecast reflects considerable smoothing, but even without that inevitable variability that one always finds in the quarterly GDP pattern, the EU Commission’s forecast depicts the major industrial economies gliding at stall-speed for the coming two years and thus vulnerable to any unforeseen shock. It is a recipe for the kind of recession-punctuated slumber that Japan experienced in the 1990’s and early this decade.
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