EU Says Euro Zone to Shrink in 2013 as Unemployment Rises

The euro-area economy will shrink for a second year in 2013, driving unemployment higher as governments, consumers and companies curb spending, the European Commission said.

 The 17-nation euro zone’s gross domestic product will fall 0.3 percent this year, compared with a November prediction of 0.1 percent growth, the Brussels-based commission forecast today. Unemployment will climb to 12.2 percent, up from the previous estimate of 11.8 percent and 11.4 percent last year, it said. 

Europe’s labor market “is a serious concern,” Marco Buti, head of the commission’s economics department, said in a statement. “This has grave social consequences and will, if unemployment becomes structurally entrenched, also weigh on growth perspectives going forward.” 

The euro area is hamstrung by fragile public finances, vulnerable banks and a weak economy feeding, Buti said.

 The economic weakness contrasts with financial-market improvements, as nations, banks and households improve their balance sheets and hold off on new demand.

The commission cut its forecast for the German economy, Europe’s largest, to 0.5 percent growth this year, from 0.8 forecast in November, due to a drop in euro-area demand that damps export and investment.

The outlook for next year was more upbeat, with 2014 forecasts of 1.4 percent growth and 12.1 percent unemployment in the euro area. Across the 27-nation European Union, the commission is projecting 0.1 percent growth for 2013 and 1.6 percent growth in 2014, after a 0.3 percent contraction last year. 

The Stoxx 600 Index (SXXP) has climbed about 3 percent this year after a 14 percent advance last year. The euro has gained 6 percent against the dollar the past six months.