Brussels, 29/03/2004 (Agence Europe) - The euro-area's moderate recovery remains on track for 2004 despite uncertainty, notes the European Commission in its quarterly economic report, published on Monday. It confirms its predictions of economic growtn in the eurozone of between 0.3% and 0.7% of GDP during the first quarter of 2004. Accroding to the Director General of DG Economic and Monetary Affairs at the European Commission, Klaus Regling, the eurozone economy will reach its full growth potential (between 2.0% and 2.5% of GDP) in the second hald of 2004 and in 2005.
“The euro-area's moderate recovery remains on track for 2004 despite some economic indicators - particularly those relating to business confidence - having recently sent mixed signals,” notes the report. The Commission describes sluggish consumer spending as the main risk to growth. According to the Commission, analysis of the determinants of private consumption in the euro area concludes that consumer spending is currently weaker than what might be expected given its main macroeconomic determinants. The lacklustre performance of consumption in recent years can partly be explained by sluggish growth in disposable income and lagging adverse wealth effects. However, other factors seem to have weighed on consumption as well. Household confidence has probably been dented by concerns related to deteriorating public finances in some Member States, an increasing awareness of the challenges posed by population ageing and an excessively slow structural reform process. The report says that the impact of the Madrid attacks is difficult to assess at this stage, but other risks include strong appreciation of the euro and a potential crisis in the US economy.
Against this backdrop, the long awaited rise in investment, which seems to beconing a reality, is welcome, notes the European Commission, adding that the rise in growth could well pick up thanks to favourable monetary and financial conditions and historically low short and long-term interest rates. The report notes that experts are expected to support growth over the next fex months.
The Focus Section of the report assesses the effect of the past appreciation of the euro on economic activity. In real effective terms, the euro is currently only slightly above its long-term value. According to the department headed by Commissioner Pedro Solbes, eurozone exports are far more sensitive to fluctuations in international demand than in variations in the euro exchange rate. As a result, a surge in world demand is currently more than offsetting the negative impact on exports of losses in competitiveness. Overall, the impact on the euro area should be modest. The positive effect of the strong euro on household purchasing power has so far been slow to materialise but will gain in importance in the coming months, concludes the Commission.