The eurozone economy is on course to contract nearly as sharply in the first quarter as in the fourth quarter of last year, while job losses are likely to soar to a 10-year high in 2010, a Reuters poll found. Economists slashed their forecasts again this month due to tumbling equity markets, a gloomy outlook for banks across the eurozone and into eastern Europe, and a lack of clarity on how to rescue the economy.
According to the median forecast in the poll of over 70 economists, taken March 6-11, the economy is expected to shrink 1.0 percent quarter-on-quarter in January-March. That is not far off the 1.5 percent fall witnessed in the last three months of 2008. Last month economists predicted a 0.8 percent Q1 drop. The bloc faces a much worse recession than feared only last month. The economy is now expected to contract 2.6 percent this year, some way below a 2.0 percent forecast in February. Job losses will jump, the survey showed.
Economists have fallen into line with the European Central Banks midpoint estimate of a 2.7 percent fall in GDP this year. "GDP ... could still turn out weaker in the first half of 2009 because of the slump in exports. With households also cutting back a recovery could be delayed until 2010," said Kenneth Broux at Lloyds. A big majority, or 64 of 73 economists, believe the ECB will react to a series of bad news by cutting interest rates again in the second quarter to a new all-time low of 1.0 percent.
The bank has already cut rates by 275 basis points to 1.5 percent since last October and it is discussing possible quantitative easing measures to stimulate demand in the economy. Into 2010 the outlook is far from healthy too. GDP is forecast to grow just 0.5 percent next year, despite all the rate cuts, and a host of economic stimulus measures that should feed into the economy.
The downturn will also push up unemployment sharply. A sample of 25 economists said it will peak at 10.0 percent in the third quarter of 2010, up from a forecast of 9.6 percent made in last months poll. That would also be the highest level since the summer of 1998. "The other striking development which raises concern about the growth dynamic is the sharp pick up in the pace of labour market deterioration seen in the first quarter thus far," said Maryse Pogodzinski at J.P. Morgan.
She predicted unemployment would peak at 10.0 percent in the first quarter of next year. In January official unemployment rose to 8.2 percent. The poll also pointed to a fast retreat in consumer price pressures. Inflation was expected to average 0.5 percent in 2009 and 1.3 percent in 2010, down even on last months figures. Both are well below the ECBs two percent ceiling.