The economic recovery in the EU has gained ground of late. GDP growth in the second quarter of 2010 was particularly strong, and more balanced towards domestic demand than previously anticipated.

While activity is still expected to moderate in the second half of the year, the outlook is for a slightly improved quarterly profile compared to the spring forecast, due to the spill-over of some momentum from the second quarter.

For 2010 as a whole, real GDP growth is now projected at 1.8% in the EU and 1.7% in the euro area, a sizeable upward revision. The recovery remains fragile however, with uncertainty high and developments across Member States uneven.

The Commission's inflation forecast for 2010 is broadly unchanged since the spring, at 1.8% in the EU and 1.4% in the euro area.

EU Economic and Monetary Affairs Commissioner, Olli Rehn said: The European economy is clearly on a path of recovery, more strongly than forecast in the spring, and the rebound of domestic demand bodes well for the job market.

However, uncertainties remain and safeguarding financial stability and continuing fiscal consolidation remain key priorities. At the same time, we need to frontload structural reforms to lift our growth potential. The sooner and stronger we act on this front, the more certain we can be of sustained growth and job creation.

Growth forecast for the EU and euro area revised up

Reflecting a better than expected first half of the year, and the spill-over of some of this momentum into the second, real GDP is forecast to grow by 1.8% in the EU and 1.7% in the euro area in 2010 (an upward revision of around ¾ percentage point compared to the spring forecast).

This aggregate picture is based on updated projections for France, Germany, Italy, the Netherlands, Poland, Spain and the United Kingdom, which together account for about 80% of EU GDP.

At the disaggregate level, developments remain uneven across Member States, with the German and Polish economies performing strongest. This unevenness reflects differences in production structures, the scale of adjustment challenges and ongoing rebalancing within the EU and euro area.

Global recovery loosing momentum

With support from inventory building and stimulus measures waning, the global recovery is set to go through a soft patch in the second half of the year, though a 'double-dip' seems unlikely.

Despite this softening, global GDP (excl. EU) is projected to grow by some 5% in 2010, a ¼ pp. higher than in the spring forecast. This follows from the fact that economic activity was stronger than anticipated in the first part of the year.

As in the spring, the outlook is for an uneven recovery, with robust growth in emerging economies but a still fragile situation in several advanced economies.

Rebalancing of EU growth towards domestic demand

GDP growth in the EU is also expected to ease in the second half of 2010, reflecting the softening of the global economy and the fading of the temporary factors that kick-started the recovery.

Nonetheless, the spill-over of some momentum from the second quarter implies a slight upward revision to the quarterly profile compared to the spring forecast. GDP is now projected to expand by 0.5% in the EU and euro area in the third quarter, and by 0.4% and 0.3% respectively in the fourth.

This brighter outlook is supported, inter alia, by sentiment indicators which point to a continuing expansion of economic activity in the coming months.

Moreover, it appears that the recovery is broadening out across sectors and demand components. In particular, the contribution of private investment and consumption to GDP growth in the second quarter of 2010 exceeded the combined contributions of inventories and net exports.

This rebalancing is encouraging, especially as the weaker external environment in the second part of the year is set to have a dampening effect on EU export growth. On the other hand, financial markets are still fragile, having recovered only partly from the tensions experienced last May.

Inflation remains subdued

The first half of 2010 saw a moderate rise in HICP inflation, on the back of increasing global commodity prices and upward food and energy base effects.

Looking ahead, the remaining slack in the economy, subdued wage growth and low inflation expectations should keep inflation in check, notwithstanding recent exchange-rate developments and weather-related price rises in some agro-commodities.

For 2010 as a whole, HICP inflation is projected to average 1.8% in the EU and 1.4% in the euro area, broadly unchanged from the spring forecast.

Risk assessment

Amid continued high uncertainty, risks to the EU growth outlook for 2010 appear broadly balanced. On the upside, the rebalancing of GDP growth towards domestic demand, and the spill-over from the pick-up in activity in Germany to other Member States, may materialise to a greater extent than currently envisaged.

On the downside, softer than expected external demand and further tensions in financial markets cannot be ruled out, while fiscal consolidation could weigh more on domestic demand in the countries concerned than anticipated. As for the inflation outlook, risks also appear to be broadly balanced for 2010.