BRUSSELS, Sept 14 – The European Union economy will climb out of recession in the third quarter, the European Commission said on Monday, but any recovery will be weak and held hostage to rising unemployment and strained government finances.
The commission said the upturn will be "volatile" and "sub-par," leaving political leaders with difficult choices as they try to time the withdrawal of massive state stimulus programmes.
The 16-nation eurozone and the broader 27-member EU as a whole will still contract four percent this year, unchanged from forecasts made in May, but the route to that outcome has changed significantly.
The commission now expects 0.2 percent growth in the three months to September, followed by 0.1 percent in the final quarter for the eurozone and EU.
The May forecasts assumed a 0.3 percent slide in the third quarter, with positive growth, of 0.1 percent, not expected until the second quarter of 2010.
In the first quarter, the eurozone economy shrank a record 2.5 percent but came close to positive territory in the second, shrinking just 0.1 percent as France and Germany returned to growth at 0.3 percent each.
For the 27-nation EU, the economy shrank 0.2 percent in the second quarter.
Economic and Monetary Affairs Commissioner Joaquin Almunia said a sharp upturn in the global economy meant "the drop is behind us" but also noted that it was based mainly on stimulus measures that "will not be there forever."
He said governments and the commission have to agree beforehand on when, where and how to withdraw support packages to the financial sector and wider economy, while controlling public deficits in the medium term.
Otherwise, he said, they "will create protectionist tensions and inefficiencies."
The global credit crisis forced EU governments to pledge trillions of dollars to back up their faltering banking systems and spend billions more on direct stimulus programmes to get the economy working again.
Despite a slew of more positive data since May, the lagging effects of recession have seen unemployment burst through the 15-million barrier in the euro countries — and Almunia said that those numbers would continue to rise.
"The situation has improved — mainly due to the unprecedented amounts of money pumped into the economy by central banks and public authorities — but the weak (broader) economy will continue to take its toll on jobs and public finances," he stressed in a statement.
"The full impact of the crisis on labour markets and public finance is still to come, and the correction in housing markets continues to hold back construction investment in several countries."
The commission\’s bi-annual interim forecast said inflation in 2009 would remain unchanged at 0.9 percent across the 27 EU countries and at 0.4 percent for the euro nations.
However, Almunia warned that with energy and food prices having reversed their slide, and commodity prices also moving upwards, "headline inflation will increase towards the end of the year."
Nervous consumers across Europe, many cushioned from the worst of the recession thanks to ultra-low interest rates, fear a double-whammy of rising repayments on loans and a sharp escalation in prices when the drip-feed of state economic support is eventually scaled back.
The projections are calculated from data drawn from Britain, France, Germany, Italy, the Netherlands, Poland and Spain, which together account for 80 percent of the EU\’s total economic output.
Germany is expected to lead the recovery with the greatest third-quarter gain, with Spain heading towards "stabilisation" and Italy showing "gradual improvement," Almunia said.
The Netherlands will end its recession later, but Poland, which recorded the fastest growth, was now experiencing slower growth.
Britain will also "return to positive territory before the year\’s end," he added.
British labour unions warned on Monday of unrest in anticipation of drastic public sector cuts in the wake of a general election there due by May 2010.