Brussels, 20/12/2005 (Agence Europe) - The development of growth at the end of this year is good, said the Director-General in charge of economic and monetary affairs at the European Commission, on Tuesday. Presenting the quarterly report on the economy of the euro zone, Klaus Regling said that activity had speeded up on the third quarter of 2005, with a rate higher than its potential (+0.6%), in line with the latest autumn forecasts of the Commission (EUROPE 9070). For the last quarter of 2005 and the first quarter of 2006, growth will have solid bases and its "composition seems more encouraging" than has been the case recently. Even in private consumption, which is "still quite low", it has been possible to note "improvements over recent months", said Mr Regling. It is investments which are pulling internal demand upwards, he observed, whereas global demand, which is essential for the euro zone, has continued to grow stronger since the beginning of the year, partly due to the depreciation of the euro. Overall, short-term risks "seem more balanced than was the case three months ago", the report goes on to emphasise.
The economic indicators anticipate solid growth over the last three months of the year, and the Commission, which predicts an increase in economic activity at a level between 0.4% and 0.8% for the next two quarters, is slightly more optimistic than in its autumn forecasts. It states that favourable monetary and financial conditions are an essential element of this upturn in activity. Despite the recent increase in interest rates, these rates remained "extremely low" on the long term, the Commission underlines, citing several reasons for this.
The upturn in investments saw an unprecedented peak which had not been seen over the last five years, with an increase of 1.6%, leading to a rise of 0.3% on the increase of GDP. Consumption has continued to make progress since the beginning of the year, with +0.3% in the third quarter, but is still not overly intense, due to consumer confidence levels which remain low, and pressure brought to bear by price rises (up to 2.6% in September and 2.4% in November). In the short term, consumption is unlikely to offer much support to the economy, the report notes, adding however that household confidence could be of benefit to the noted improvements on the employment market, with a drop in unemployment (from 8.6% in 2005 to 8.4% in 2006) and job creation.
Internally, the risks are more balanced for the euro zone, whereas externally, the threat of higher and more volatile oil prices are creating more of an incentive towards caution. Improved confidence could, in particular, liberate a proportion of "pent-up demand", said Mr Regling. Taking Germany as an example, he noted that in this country, confidence was on the up and that positive signs identified in the autumn forecasts were starting to materialise. Although the Commission is not in the habit of revising its growth forecasts between its spring and autumn exercises, the Director-General indicated that all economic institutes were currently increasing their economic anticipations the Germany in 2006 (from 1.2% to around 1.6-1.8%, he said).
The Commission also analysed the impact of oil prices in general price levels. Aside from the direct effect (which is visible on prices), the second-round effect on salary negotiations and the setting of prices (still non-existent at this stage), the increase in barrel prices has also made itself felt indirectly. Contributing to in the region of one percentage point of the inflation rate in the euro zone, the effects of high oil prices, which are relatively stabilised today, may also take time to become visible. Indirect pressure is starting to make itself felt in that producers are adding costs on to end prices, the Commission notes, judging that this pressure may become even keener on 2006, even if oil prices remain at their current level between now and then.
In the longer term, the Commission is also interested in the impact of the ageing population between now and 2050, in the fields of growth and employment (two workers for every pensioner). The Commission recommends that the Lisbon reforms be implemented without delay, going even further in order to improve the functioning of the employment market and increase productivity. Even if the Lisbon objectives in terms of employment rates are achieved, the impact of ageing cannot be otherwise than temporarily limited for the euro zone, the report warns. A window of opportunity exists until 2011, to undertake structural reforms, the report points out, whereas the effects of ageing will dominate after 2017, with a drop of both the work-age population and number of people employed, even though the trajectory is unlikely to be uniform for all the Member States. Sources of growth will also change gradually, ending up based on the productivity of work, to the detriment of the contribution made by employment. The growth potential of the euro zone, in the region of 2.1% over the period 2004-2010, will also see a progressive decline, falling to 1.7% (between 2011 and 2030) and 1.2% (between 2031 and 2050), leading to a partial decrease in standards of living post-2012. The stakes are multiple, from the point of view of public finances, and the answers will have to be extremely well targeted in order to face up to the challenges of ageing, the Commission stresses, pointing out, for example, the importance of extending active life and adapting social protection policies. Amongst other things, it pleaded in favour of flexibility of the retirement age, adapted as a function of life expectancy.