Europe expecting weak recovery in 2013

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BRUSSELS -- The European Union will experience only a very weak economic recovery next year, and unemployment will remain at "very high" levels, according to a gloomy set of forecasts issued Wednesday by the European Commission.

The forecasts, combined with European business' general disappointment about the outcome of the U.S. presidential election, helped send stocks lower Wednesday on the Continent and in London -- a downward drift that carried over to Wall Street through midday there.

Gross domestic product will shrink 0.3 percent for the 27 European Union members as a whole this year, and 0.4 percent for the 17 eurozone members, the commission predicted. Growth in 2013 will be 0.4 percent across the European Union and 0.1 percent in the euro area, it said.

The figures represent a significant downgrade of expectations. In its spring economic forecast, the commission had predicted that GDP in the eurozone would shrink 0.3 percent this year before rebounding to growth of 1 percent next year. The spring forecast had also said growth in the European Union as a whole would remain flat this year, but then rise to 1.3 percent in 2013.

Now, the commission predicts that Europe will have to wait more than a year to generate "a stronger and more evenly distributed expansion." It forecast growth for 2014 of 1.6 percent across the European Union and of 1.4 percent in the euro area.

Olli Rehn, the economic and monetary affairs commissioner, sought to put a positive spin on the figures, saying they showed "a gradual improvement in Europe's growth outlook from early next year." He also highlighted that "market stress has been reduced" since leaders began to overhaul the institutions running the euro and since the European Central Bank pledged to shore up vulnerable economies.

But Mr. Rehn acknowledged that Europe was going through a "difficult process of macroeconomic rebalancing, which will still last for some time." And he highlighted a need to "bring unemployment down from the current unacceptably high levels."

Unemployment will peak next year at slightly below 11 percent across the European Union and at 12 percent in the euro area, according to the commission.

James Nixon, chief European economist in London for Societe Generale, said the figures probably overestimated growth prospects. "It's going to be a tough couple of years," he said.

In its report, the commission attributed the grim outlook in part to a "weak starting point" in 2012, including the likely worsening of the government debt crisis in countries such as Spain during the first half of the year, which fed concerns about the euro's viability and added to banking sector stresses.

"It is quite a pessimistic conclusion on Spain, which suggests that they are going to miss deficit targets by a distance," Mr. Nixon said. "I think the implication of that is that we are likely to see more austerity next year, and that means that the growth outlook will be worse than predicted.

"The countries of Southern Europe are engaging in multiyear adjustment programs," he said. "It is unrealistic to expect Spain and Italy to exit these programs before 2015."

The report also underlined the hazard the European Union faces from devastatingly high unemployment, which could "bring social hardship and a destruction of human capital detrimental to longer-term growth." Specific country targets reported by the commission included the following:

• Spain: GDP shrinkage of 1.4 percent this year and next before returning to growth of 0.8 percent in 2014.

• Greece: a contraction of 6 percent this year and of 4.2 percent in 2013, before returning to growth of 0.6 percent in 2014.

• Germany: growth in the bloc's biggest economy of 0.8 percent this year and next, and of 2 percent in 2014.

• France: growth of 0.2 percent this year, 0.4 percent in 2013 and 1.2 percent in 2014.

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