BRUSSELS — The European Union economy will shrink by 4.0 percent in 2009 but will climb out of recession in the third quarter, the European Commission said on Monday.
But the recovery from recession will be weighed down by rising unemployment and strained government finances.
The headline figure, which was the same for the 16 countries that use the single euro currency as across the European Union's 27 member states, remains identical to the previous forecast in May because tentative signs of recovery are described as "volatile" and "sub-par."
"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," said Economic and Monetary Affairs Commissioner Joaquin Almunia in a statement.
Despite a slew of positive data since May pointing to what the commission said would be "a certain recovery in the coming quarters," the lagging effects of grim recession have already seen unemployment burst through the 15-million barrier in the euro countries -- a watershed last seen in May 1999.
And "because of downward revisions to the previous estimates for 2008 and the first quarter of 2009, the rate of the projected fall in Gross Domestic Product in 2009 as a whole remains unchanged at 4.0 percent in both the EU and the euro area," the statement added.
The commission's bi-annual interim forecast said inflation in 2009 would also remain unchanged at 0.9 percent across the 27 EU countries and 0.4 percent throughout the euro nations.
However, EU economists warned that with energy and food prices having reversed their slide, and commodity prices also moving upwards, "the inflation rate is set to 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.
Despite a sharp upturn in the world economic picture -- with the projected global fall in GDP halved from 1.4 percent in May's forecast to 0.7 percent -- the EU said uncertainty "remains rife."
It added: "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 recovery may therefore prove volatile and sub-par further down the line."
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 GDP.
Growth in the third quarter compared to the second three months of 2009 is predicted to be 0.2 percent in both the eurozone and the EU as a whole, falling back to 0.1 percent over the following three-month period.
British labour unions warned on Monday of "riots in the streets" as drastic public sector cuts required to hack away at bloated deficits linked to banking bail-outs drive unemployment still higher.
Governments may be reluctant to bring forward painful policy changes where elections loom -- as in Britain, where a vote is expected in May 2010.
The global credit crisis forced EU governments to pledge more than 3.77 trillion euros (5.38 trillion dollars) to prop up banks, although some have begun to turn a profit on these debt-buying sprees.
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