Brussels, 24/04/2002 (Agence Europe) - On Wednesday, the European Commission announced its economic forecasts for the period 2001-2003, which highlight a return to confidence and recovery in international trade, despite the risk of worsening public finance in some Member States (mainly Germany and Portugal). The Commission supports its forecasts with more political comments. It is thus requested of countries that they promote job creation and increase Europe's growth potential, a potential that it considers still too moderate. Four countries (Germany, Portugal, France and Italy) are also strongly advised to respect the commitments taken in the context of their stability programmes (to reach budgetary balance by 2004 at least).
Services under Commissioner Pedro Solbes are tabling on growth of 1.4% in 2002 and of 2.9% in 2003 for countries of the euro zone, and 1.5% in 2002 and 2.9% in 2003 for the EU countries as a whole. Germany should this year record the lowest growth with 0.8% in 2002 (then 2.7% in 2003). The Commission predicts a public deficit within the euro zone of 1.4% of the Gross Domestic Product (GDP) in 2002 and 1.2% in 2003, of which 2.8% then 2.1% in Germany, 1.9% then 1.8% in France, 1.3% in 2002 and 2003 for Italy, and 2.5% in 2002 for Portugal. The Commission also predicts a fall in inflation over the second half of 2002, which should reach 2.2% over the whole year, and 2% in 2003, figures that are less optimistic than before (2% if not less before the end of the year), mainly because of the rise in oil prices. These estimates also show that the economy of the euro zone will indeed create jobs but in a very limited way (+0.3%), which should cause a slight rise in the unemployment rate (8.5% in 2002, as opposed to 8.3% in 2001). The Commission considers that the pick-up in job creation will be greater in 2003 (+1.1%), which could contribute to bringing the unemployment rate down below the recorded 2001 level (8.1%). Over the whole of the euro zone, employment will increase by 1.8 million units in two years (2002 and 2003).
We give below a summary of the facts given by the Commission on the European economy:
- "Timid" recovery in euro zone: The Commission recalls that, in 2000 and 2001, the average rate of growth in the euro zone was cut by half to fall to 1.6%, and that growth was particularly weak in Germany and Finland. In Greece, the strong domestic demand offset the effect of global slowdown and, in the United Kingdom, robust private consumer demand clearly attenuated the consequences of the fall in growth. The small open economies, on the other hand, all experienced a serious slowdown. On the whole, recovery will be moderate during the first half of 2002, as the factors that are an obstacle to it will not stop acting immediately. Exports are suffering from the ever weak level in external demand, investment is held back by uncertainty and households hesitate to spend fearing the consequences of unemployment and the rise in prices on their real income.
- Conditions are met for sustainable recovery: The economic activity of the euro zone should intensify during the second half of this year to allow growth to continue with the same thrust in 2003. Inflation will tend to slow down and the prospects of employment will improve from the middle and the end of the year respectively, which should encourage households to step up spending. Private consumption is expected to accelerate and make a greater contribution to growth. The average rate of progression in private consumption should reach 2.5% in 2003 in the euro zone as opposed to 1.2% this year. Investment activity slowed down in 2001 and forecasts were considerably revised downwards, following reduced profit expectations. Equipment investment will on average fall again during the current year, but a turnaround is in the offing as spare capacities are absorbed and prospects brighten, writes the Commission. In 2003, investment could increase 5.9% on average in the euro area. Construction activity in Germany continues to weigh negatively on the euro area average, but this should improve next year, the Commission predicts.
- "Temporary and contained" increase in unemployment: "The slowdown takes its toll on the labour market, but thanks to past structural reform damage is likely to be smaller". The Commission, which expects a law rate of job creation this year (0.3%), specifies that, in four countries (Germany, Austria, Finland and Sweden) "the number of persons losing their job is larger than those getting one in 2002 and overall employment declines".
- Wage moderation should continue: according to the Commission, work productivity only increased slightly (0.3%) last year in the euro zone and wages should increase by some 3% a year in 2002 and 2003, i.e., slightly faster than the two previous years. In that context, the unit cost of labour recorded a steep rise in 2001, which, however, should slow down. Nevertheless, in Ireland, the Netherlands and Portugal, countries with low unemployment, these costs have tended to increase and created inflationary tensions. Likewise, in Greece and Finland, where the level of unemployment remains relatively high, the rise in the unit cost of labour could have an effect on inflation and slow down the fall in unemployment.
- Delayed decline in inflation: the fall in inflation, begun in June 2001, stopped early-2002 due to changes made to indirect taxation in several Member States and the steep rise in the price of food. Furthermore, the introduction of coins and banknotes in euro could have contributed to the increase in inflation to the tune of 0.16%, the Commission recalls, concerned, moreover, by the rise in the price of oil.
- Public finances responding to the cycle: in certain Member States (Denmark, Spain, Italy, Austria and Sweden) the general government budgetary balance improved: Belgium only recorded a slight deterioration. In these countries, the impact of the economic slowdown on public finances was tempered by a triggering of sound fiscal policy. Greece also recorded a reduction in its public deficit, thanks to "vigorous" growth. In Germany and Portugal, the general government deficit started approaching the reference value of 3% of GDP, as "the operation of the automatic stabilisers or tax cuts were not offset". In 2002, the German and Portuguese public deficits will remain close to the ceiling of 3%. Contrary to 2001, the public finances of Belgium, Austria and the United Kingdom will fall into deficit this year. Belgium and Austria will correct this in 2003, whereas the Netherlands should, that year, join the group of countries presenting a deficit. According to the budgetary forecasts for 2003, Germany, France, Italy and Portugal "have to step up their efforts to meet the commitments they made to realise government accounts close to a balance or a surplus by 2004 at the latest". Ireland's comfortable surplus will have completely dwindled between 2000 and 2003.
"We have good potential for growth, even though it remains relatively low. We must try to enhance growth in productivity, by, notably, creating a climate favourable for investments and innovation", said Solbes, at a press conference, considering that investment performance was one of the key factors of productivity. Indeed, investments, that for the first time in 20 years did not increase in 2001, seem to have taken off again and should increase by some 7% in 2003.
