The euro zone faces a deeper recession than thought, with a 0.3% contraction in GDP now expected for 2012 by the EU compared with 0.5% growth in its last November forecast.
"The unexpected stalling of the recovery in late 2011 is set to extend into the first two quarters of 2012," the European Commission said today but stressed it saw a "mild recession with signs of stabilisation."
Announcing the bi-annual forecast, European Union Economy Commissioner Olli Rehn put the figures into context by comparing to overall global growth which he expected to be 4.3% this year.
Unusually, the EU executive fed in data from all 27 EU states - not just the seven biggest - in a bid to make its forecasts more robust.
The European Commission said "modest growth is predicted to return in the second half of the year," with inflation revised "slightly upwards" to 2.1% across the 17-state euro currency area, mainly due to energy costs and "increases in indirect taxes."
Commission sees slower Irish export growth
In its forecast, the European Commission has said that Ireland's economy is estimated to have returned to modest growth of 0.9% in 2011, after a sharp 10% contraction in output between 2008 and 2010.
It said that after stronger than expected growth in the first half of 2011, the data for the third quarter were weaker than anticipated with GDP falling by 1.9% quarter-on-quarter despite a good export performance. The Commission noted that for 2011 as whole, growth is estimated to have been entirely export-led.
However, it said that due to the weaker projected outlook for the euro area, Irish export growth is expected to slow this year, although the unchanged outlook for the UK and US economies - major trading partners with Ireland - will provide some support.
The Commission predicts that GDP will grow by a modest 0.5% this year. Private consumption is set to fall once again as households continue to cut back on spending and the continuing reduction in construction activity will see investment activity fall again.
Unemployment here is also expected to rise again in 2012 because of cuts to the public sector and the financial services sector, while the unemployment level may be offset by emigration.
Today's report predicts that Irish inflation will rise to 1.6% in 2012 due in part to the depreciation of the euro against sterling. Household consumption could be lower than projected because householders continue to pay down debts.
''Given Ireland's very small and open economy, quarterly figures are particularly volatile and subjected to revision. Thus, they should be interpreted with caution'', the Commission noted.
Greece and Italy continue to cause concern
A fifth year of recession in Greece is now expected in Brussels to result in a 4.4% contraction of gross domestic product in 2012. As the Greek government pursues a €107 billion write-down of private debt and a fresh €130 billion-plus bail-out from international backers, the figure was however better than the 5.5% slide forecast in December by Prime Minister Lucas Papademos.
However, Italy, which carries the euro zone's biggest debt burden of about €1.3 trillion, faces a recession that will cut output by 1.3% in 2012. The last official forecast from the government in Rome was for a 0.4% fall, although the Bank of Italy last month tipped between 1.2% and 1.5%, while the IMF predicted an even worse result, a 2.2% drop.
"Although growth has stalled, we are seeing signs of stabilisation in the European economy," Rehn said highlighting "easing" stress in financial markets.
The Commission cited a a "less supportive" global economy "weighing on net exports" as well as low business and consumer confidence in Europe, although the forecast maintained that "a credit crunch has been avoided."
