* New forecasts revised sharply downwards
* Euro zone unemployment seen at 11.5 pct by end-2010
* But EU exec sees some "positive signals"
(Adds Almunia news conference)
By Jan Strupczewski
BRUSSELS, May 4 (Reuters) - Europe's economy will not start
recovering until the second half of next year, the European
Commission said on Monday as it slashed its forecasts to reflect
the region's deepest recession since World War Two.
Despite what it called some "positive signals" in recent
days, the EU's executive arm said the economy of the 16-country
euro currency zone would shrink 4.0 percent this year and by 0.1
percent next year. []
"The European economy is in the midst of its deepest and
most widespread recession in the post-war era," Economic and
Monetary Affairs Commissioner Joaquin Almunia said in a
statement.
"The outlook is still gloomy, but for the first time since
mid-2007 some positive signals have appeared in the last week,"
he told a news conference later, noting healthier financial
markets and an improvement in business expectations indices.
"We are no longer in a free-fall," he added.
The Commission growth forecasts are a sharp downward
revision of Jan. 19 projections of a 1.9 percent contraction
this year and 0.4 percent growth in 2010.
The Commission also forecast soaring unemployment that would
reach 11.5 percent of the workforce in 2010 []
and inflation well below the European Central Bank's target this
year and next. []
The ECB meets on monetary policy on May 7, when it is
expected to cut its main refinancing rate by 25 basis points to
1.0 percent and announce other ways of policy easing.
ACTION ON TOXIC ASSETS
Almunia warned that for the 2010 recovery to happen, Europe
had first to deal with toxic assets on banks' balance sheets
that were choking off lending to the credit-starved economy.
"We need to proceed rapidly with the cleaning up of the
impaired assets on bank balance sheets and recapitalise banks
when appropriate," Almunia said.
The Commission's growth forecasts are slightly more upbeat
than those of the International Monetary Fund, which expects the
euro zone to contract 4.2 percent this year and 0.4 percent in
2010.
But they are more pessimistic than the ECB's worst-case
scenario of a 3.2 percent economic decline in 2009.
In the wider, 27-nation European Union, the economy would
also contract by 4 percent this year and 0.1 percent in 2010,
the Commission said, revising its January forecasts of a 1.8
percent recession in 2009 and 0.5 percent growth in 2010.
"The main factors behind the recession are the worsening of
the global financial crisis, a sharp contraction in world trade
and ongoing housing market corrections in some economies," the
Commission said in a statement.
The Commission expects euro zone inflation, which the ECB
wants to be below but close to 2 percent over the medium term,
to slow to 0.4 percent this year from 3.3 percent in 2008 and
accelerate only to 1.2 percent in 2010.
EASTERN IMPACT
"The risk of a deflation scenario, i.e. a persistent
decline in a very broad set of prices, propagated by
a self-reinforcing expectation of further price
declines, appears limited at the current juncture, at
least at the aggregate level," the Commission said.
The EU executive expects unemployment in the euro zone to
jump to 9.9 percent of the workforce this year from 7.5 percent
last year and soar to 11.5 percent in 2010.
Europe's public finances are taking a hit. The Commission
forecasts that the euro zone budget deficit will more than
triple to 6.5 percent of gross domestic product next year, well
above the EU's upper target rate of 3 percent. [].
While Ireland will have the biggest budget gap in Europe
with a deficit of 12 percent of GDP this year rising to 15.6
percent in 2010, the effect of the slowdown will also be
dramatic in eastern European countries, ending years of growth
and potentially undermining their efforts to join the euro.
[]
Almunia said the Commission would proceed with disciplinary
steps versus Malta, Poland, Lithuania and Latvia, the latest in
a line of measures taken against states with rising deficits.
(Editing by Mark John and Dale Hudson)
