After the end of tumultuous year in 2010, the euro zone will be
entering a new year that is also expected to witness volatility and
tensions in markets due to the continuation of a number of factors.
First, the pace of progress in the euro zone started to slowdown
starting from the second half of the year to coincide with the
sluggish growth pace in major economies, and amid the intended sharp
spending cuts announced by many European economies to lower their
deficit and to come back to the EU standards growth will probably
remain at slow pace in 2011.
Second, despite agreeing to put permanent mechanism by European
leaders for potential debt crisis, the split among members, especially
amid the dominance of Germany and France, and inability to make bold
decisions may lower confidence and add to concerns.
Third, some highly indebted countries in the region, specifically
Portugal and Spain, may ask for bailout while Greece and Ireland,
which received rescue packages from EU and IMF, may not be able to
meet their debt requirements. Fourth, worries may persist in markets
with the ongoing announcements by rating agencies for downgrade or
possible cut in credit rating of debt-mired nations. On the upside,
the abovementioned factors may have positive effect on the European
shared currency that might depreciate, thereby giving the chance for
European goods to have a competitive edge.
!! Growth !!
The latest forecasts by the European commission noted that GDP in the
EU 27 is predicted to reach 1.8% in 2010, 1.7% in 2011 and by 2.0% in
2012. Growth in the euro zone is expected to come in at 1.7% in 2010,
1.5% in 2011 and 1.8% in 2012.
In Germany, the European superpower, following an expected growth of
3.7% in 2010, the pace will slow to 2.2% in 2011 and 2.0% in 2012. The
second-largest economy in the euro region, France, will expand 1.6% in
2010 and 2011 and then rise to 1.8% in 2012.
The report mentioned that the fastest growing pace will be witnessed
in the Estonia that will join the euro zone in January 2011, while EU
economies, including Ireland and Spain, will return to growth next
year to leave recession by the start of the coming year except Greece
and Portugal.
Ireland is expected to grow 0.9% in 2011 and 1.9% in 2012 and Spain's
economic growth next year will be 0.7% after contracting 0.4% in 2010,
according to the Commission's latest forecasts. Italy, the
third-largest economy, is projected to expand 0.8% this year and 1.8%
in 2011.
Portugal is predicted to fall back into recession by shrinking 1% next
year, while Greece will show slight improvement but will contract in
2011. For 2012, Portugal will record positive 0.8% growth in 2012 and
Greece's economy is estimated to have 1.1% expansion.
The European Central Bank said in December euro area economies will
expand 1.7% before slowing to 1.4% in 2011 and rebound back to 1.7% in
2012.
The OECD said annual economic growth of 1.5% to 2% over the coming two
years is expected for the 16 nation using the shared currency.
As for the IMF, they expected the euro area to expand 1.6% in 2010,
followed by 1.4% and 1.7% growth in 2011 and 2012 respectively. For
the EU, the IMF forecasts 1% growth for 2010 and 1.3% in 2011.
!! Unemployment !!
Despite the expected rise in unemployment rates next year due to the
intended spending cuts that are expected to shave more employment
opportunities, the Commission expects employment to improve in 2011,
while in 2012 the rate should gradually drops to about 9%.
In Spain which has the highest unemployment records, the rate is
estimated to retreat to 19.8% in 2011 after inching up from 19.7% in
2010.
!! Inflation !!
With the expansion in purchasing bonds by major government to boost
recovery and continual rise in commodity prices, inflation is
estimated to be higher next year, referring that sharp spending cuts,
on the other hand, will cap prices from breaching the ECB's target.
ECB's latest forecasts indicated that inflation in the euro zone would
reach 1.6% this year and 1.8% in 2011, and then it will decline to
1.5% in 2012. The European Commission forecasts were quite close to
the ECB's estimates as it predicted 1.5% in 2010 and 1.8% for 2011.
!! Budget Deficit !!
Despite the intended spending cuts by highly indebted European
governments, the budget deficit is expected to remain high next year.
The budget deficit for the EU bloc is expected to drop from 6.8% of
GDP in 2010 to 5.1% in 2011 then to 4.2% the year after. In the euro
region, the deficit will decline to 6.3% in 2010, 4.6% in 2011 and
3.9% in 2012 which will be still above the EU's ceiling of 3%.
Greece will suffer 124.9% in 2010 and 133.9% in 2011 and the Italian
debt will climb to 118.2% then 118.9% in 2010 and 2011, above the
115.8% in 2009. The Portuguese debt would settle at 85.8% this year
and 91.1% next year and the Irish debt will rise to 77.3% in 2010 from
64.0% in 2009 and then incline to 87.3% in 2011. In Spain, the debt is
expected to be around 64.9% of GDP in 2010 and 72.5% in 2011.
!! ECB Monetary Actions !!
The ECB will probably keep interest rate unchanged until at least the
first half of 2011 to reinvigorate recovery while it will continue the
gradual withdrawal of unorthodox measures to lower European bank's
dependency on ECB loans.
Yet, policy makers may slow the pace of unwinding non-standard
measures if they felt that there is a need to keep for a longer while.
The ECB is expected not to intervene in the case if the euro
depreciated as this will support growth like what happened in the
first half of 2010, yet the euro is predicted to rebound in the second
half of 2011, especially the dollar is set to dip after the expiry of
the $600 billion QE2 in June.
Also, as long as inflation is moving below the bank's target no
intervention is expected to take place by the Governing Council.
* Forecast EuroZone 2011
Source: Fxstreet.com
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