* New forecasts revised sharply downwards
* Euro zone unemployment seen at 11.5 pct by end-2010
* Deflation risk seen limited
By Jan Strupczewski
BRUSSELS, May 4 (Reuters) - The European economy is in its
deepest recession since World War Two and growth rates will only
turn modestly positive in the second half of 2010, the European
Commission said on Monday in downwardly revised forecasts.
In its latest economic predictions for the 27-nation
European Union and the 16-member euro zone, the EU executive arm
said the euro zone economy would shrink 4.0 percent this year
and 0.1 percent again 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.
"But the ambitious measures taken by governments and central
banks in these exceptional circumstances are expected to put a
floor under the fall in economic activity this year and enable a
recovery next year," he said in a statement.
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 and is expected to
cut its main refinancing rate by 25 basis points to 1.0 percent
and announce other ways of policy easing.
Almunia warned that for the 2010 recovery to happen, Europe
had to first 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.
DEFLATION RISK LIMITED
The Commission's growth forecasts are slightly more upbeat
than the International Monetary Fund's, 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 whole of the 27-nation EU, the economy would also
contract four 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 keep 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.
"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.
(Reporting by Jan Strupczewski, editing by Mark John)
