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Euro Challenge

2012

The Current Economic Situation


The Euro Area Economic Situation November 2012
The euro area economy as a whole started to contract (i.e., growth became negative) at the end of 2011. In 2012, the euro area will likely undergo a mild recession (negative growth) but is expected to stage a gradual recovery in the course of 2013. Already, there are signs of stabilization in the financial markets, and recent measures taken by European leaders and by the ECB are helping to overcome the so-called "euro crisis". That crisis, which originated as a debt crisis in a few "peripheral" euro area countries (Greece, Ireland and Portugal) widened in 2011 as investors feared that the troubles would spread to larger countries (so-called "contagion", in particular to Spain and Italy) and that European leaders would not be able to manage the crisis. The depth and persistence of the crisis have affected the euro area economy as a whole via several channels: 1) banks are lending less money to businesses and consumers; 2) worried businesses in turn lay off workers and worried consumers spend less to purchase goods and services; and 3) governments cut spending in an effort to bring down deficit and debt levels (what economists call "fiscal consolidation" or "austerity"), which helps address the debt crisis but weighs on growth. Exports of euro area countries have also been hurt by the slowdown in their European and global trading partners. The European Commission's economic forecast from Autumn 2012 predicts GDP growth will be slightly negative in 2012 (-0.4% decline compared to 2011). Unemployment is again rising and stood at a very high level of over 11.6% in September 2012 in the euro area. After increasing sharply in 2011, inflation is forecast to come down slowly toward the ECBs preferred range (close to but below 2%). Euro Area Economic Indicators
2010 GDP growth (real) Unemployment rate Inflation 1.9% 10.1% 1.6% 2011 1.4% 10.1% 2.7%
11/ 2012 Forecast

Key concepts
Gross Domestic Product (GDP) is the value of all goods and services produced in a geographical region over a period of time (years, quarters, months). GDP growth tells you by how much GDP increased in a given year or quarter. It is usually expressed as a percentage. In normal times, GDP growth is positive. In a recession, it turns negative. Some part of the increase in GDP over a given period may be due to increases in the prices of goods and services (inflation). Real GDP growth tells you how much of the increase in GDP is due to increased production of goods and services, i.e. after stripping out inflation. The unemployment rate is a measure of how much of the labor force is not employed. An unemployed worker is someone who is without a job, but has been actively seeking one. Inflation is the rise in the general level of prices of goods and services in an economy over a period of time.
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2012 -0.4% 11.3% 2.5%

2013 0.1% 11.8% 1.8%

2014 1.4% 11.7% 1.6%

Sources: Eurostat, European Commission.

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Euro Challenge

2012

GDP Growth After staging a moderate recovery following the deep recession of 2009, the euro area economy slowed sharply toward the end of 2011 and did not rebound as much as expected in 2012. The latest forecast from the European Commission anticipates mildly negative growth (recession) for the euro area in 2012 and GDP is expected to recover gradually in the course of 2013 as the crisis gradually abates, in part thanks to the measures taken. The recession will likely be deeper in countries most affected by the debt crisis while the recovery is expected to occur sooner in countries less directly affected. Unemployment Rate The euro area unemployment rate has risen due to worsening economic conditions and drastic spending cuts in several euro area member countries. In September 2012, the average unemployment rate for the euro area rose to 11.6%. This means that more than one out of ten workers is out of a job. In some countries, young people are particularly affected (e.g., Spain, Greece). Behind the 11.6% average figure is a huge disparity in unemployment rates between euro area countries. The unemployment rate in Austria is 4.4%, while in Spain it is over 25.8%. The unemployment rate is expected to stabilize and gradually decline as growth recovers. But it is bound to stay painfully high in countries that must cut spending sharply to get debt levels down. Inflation Inflation rose steeply in the beginning of 2011 as a result of higher energy and commodity prices and more moderately since then. Inflation is expected to fall further in response to slower economic growth. The ECB's preferred measure of inflation (the Harmonized Index of Consumer Prices) for the euro area was 2.5% in October 2012. That is still quite a bit above the ECBs target of an inflation rate of "close to, but below 2%. Still elevated oil and energy prices are preventing the inflation rate from declining more rapidly. However, when energy prices are removed, the inflation rate in the euro area is relatively low.
Euro Area & US Inflation with Forecasts
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0%
06 07 08 09 10 11 12 13 20 20 20 20 20 20 20 20 20 14

Euro Area & US GDP with Forecasts


4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0%
6 7 8 9 0 20 0 20 0 20 0 20 0 20 1

Euro area

United States

3 20 1
20 13

20 1

20 1

Source: European Economic Forecast - Autumn 2012

Euro Area & US Unemployment with Forecasts


14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 14

Euro area

United States

Source: European Economic Forecast - Autumn 2012

Euro area

United States

Source: European Economic Forecast - Autumn 2012

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20 1

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