According to the latest EU interim forecast, GDP growth is now expected to remain subdued in the second half of the year, coming close to standstill at year-end. Although the soft patch predicted in the spring forecast is now likely to deepen, it will not result in a double dip. Moreover, the current outlook is uncertain, and the balance of risks to this forecast is to the downside.

The European Commission published the latest EU interim forecast and the main conclusion is that the economic growth in the EU is slowing down. GDP growth is now expected to remain subdued in the second half of the year, coming close to standstill at year-end. On account of the stronger-than-expected performance in the first quarter, annual growth is still projected at 1.6% in the euro area and 1.7% in the EU. In comparison to the Commission's spring forecast, growth forecasts for the second half of the year have been revised down considerably, by ½ percentage point.

According to the Commission, this forecast is due to the events occurred over the summer, when signs of a more extensive weakening of global demand and world trade emerged. The recovery lost steam in the US, and indicators for world trade suggest a further weakening into the third quarter. Financial market conditions deteriorated on the back of contagion of the sovereign debt concerns in the euro area and anxiety about the outlook for growth and fiscal sustainability in the US. In addition, GDP growth in the EU in the second half of 2011 is now expected to be subdued, coming to a virtual standstill towards the end of the year. Net exports, which were again the main driver of growth in the second quarter, are set to become less dynamic. Business and consumer survey data have deteriorated sharply since the spring, indicating a weakening of domestic demand in the second half of the year and possibly beyond the horizon of the interim forecast. Ongoing balance-sheet adjustment is likely to contribute to the weakness of domestic demand. Financial market stress is set to dent confidence and increase investment cost.

The balance of risks to this forecast is to the downside. Uncertainty about the economic outlook remains high. Some of the downside risks considered in the spring forecast have now materialised. In particular, the global economy has slowed down, and hopes that the sovereign debt crisis would gradually dissipate have been disappointed. The risks to growth remain tilted to the downside. Conversely, risks to the inflation outlook have now abated somewhat since spring and are considered as balanced. The next forecast covering all EU Member States and looking further ahead will be released in November.