Brussels, 09/11/2007 (Agence Europe) - As hinted at by the figures published ahead of the Commission's autumn exercise (see EUROPE 9499), economic growth in the EU27 is expected to fall from 2.9% in 2007 to 2.4% in 2008 and 2009. Growth in the eurozone is expected to fall from 2.6% in 2007 to 2.2% in 2008 and 2.1% in 2009, according to the Commission's autumn economic forecasts published on Friday 9 November. The spring forecasts suggested that GDP would rise 2.7% in the EU27 and 2.5% in the eurozone in 2008 (see EUROPE 9421), and the downward revision is explained by recent turbulence on the financial markets. Clouds are gathering on the horizon but world business has been sustained and the EU's solid economic fundamentals should help limit the negative impact, explained Joaquin Almunia, presenting the forecasts to reporters. He said that conditions would continue to be quite favourable and countries could be more ambitious in their correction of public finances, he added, calling on member states to respect their pledge to reach their mid-term targets by 2010.
The uncertainties surrounding these forecasts are very great, greater than for previous forecasts, explained the EU Economic and Monetary Affairs Commissioner. He said that his department's research had ended on 24 October 2007, before the latest hike in oil prices and the euro's record high against the dollar. The forecasts are based on an average exchange rate of USD1.36 per euro in 2007 and USD 1.42 per euro for 2008 and 2009, and with a Brent barrel of oil costing USD 70.6 in 2006, USD 78.8 in 2008 and USD 76 in 2009. A greater than expected slowdown in the United States (the Commission is forecasting 1.7% growth in US GDP in 2008) and the continuing dysfunction in some areas of the financial markets are also feeding the major inflationary risks identified by the Commission, namely the hike in oil prices and the rising price of food.
Hit by the rising oil and commodity prices, inflation is expected to rise in the next few months and then fall back to around 2% part way through 2008. Inflation is expected to rise from 2% in the eurozone in 2007 to 2.1% on average in 2008 (falling to 2% in 2009). In the EU27, it is expected to rise from 2.3% in 2007 to 2.4% in 2008 and 2.2% in 2009. Aware that inflation is an ever greater concern for EU citizens, the Commissioner called for vigilance to ensure this short-term upward price pressure did not continue. In this connection, the rising inflation figures sent in by Latvia, Lithuania, Estonia and Bulgaria are of great concern. The difference in the eurozone between the countries with the highest rate of inflation and those with the lowest is smaller than in the EU27, but Greece and Estonia are both forecast to have inflation of above 3% for 2008.
The growth in employment registered to date is expected to continue, with a further 8 million jobs being created between 2007 and 2009, according to the Commission, which is expecting unemployment to settle at 6.6% in 2009 in the EU27 (compared with 6.8% in 2008 and 7.1% in 2007). Unemployment in the eurozone is expected to fall from 7.3% in 2007 to 7.1% in 2008 and 2009. Rising employment is expected to lead to increased consumer expenditure. Since the start of 2007, consumer spending has been the main engine of growth.
Investment has remained sustained but is forecast to lose steam due to the sharp fall in the construction industry in some member states, explains the Commission. Arguing that the turbulence on the financial markets will gradually peter out, the Commission believes that the world economy can continue to grow over the next two years, thereby feeding into growth in Europe. The problems on the financial markets, the credit crunch and the more volatile nature of the surrounding environment are facts, but we have to take into consideration the fundamentals of the EU economy, which continue to be solid, added Almunia.
Let-up in public finance correction efforts in 2008
The average public deficit will reach its lowest level for many years in 2007 both in the eurozone (0.8% of GDP) and in the EU27 (1.1% of GDP), the forecasts for 2008 and 2009 reveal a let-up in the public finance correction process (0.9% and 1.2% respectively). The current fall is unexpected to continue on the structural front either. Public debt, however, is falling and is expected to fall to 63.4% of GDP in the eurozone in 2009 (compared with 66.5% in 2007). In the EU27, public debt will fall below 60% this year (59.5% of GDP) and reach 57% by 2009.
“We do not expect further budget consolidation efforts,” lamented the Commissioner, explaining the “very positive” results obtained this year by windfalls and a slowing in public spending in some member states. If it had been the same in all member states, the results would have been better, he pointed out, observing “a sort of tiredness” among member states on the way to consolidation of public expenditure. The fact remains that, under the current forecast, by the end of 2007, no euro area country will have an excessive deficit. Although the correction of the Italian public deficit is not a surprise, the Portugal's performance should see it come back below the 3% of the Stability and Growth Pact (SGP) a year before the deadline set. To see an end to its excessive deficit procedure, it will have to wait for definitive figures for 2007, that is, next April's notifications. The Commission, then, will only be able to recommend the procedure against Portugal be closed in May 2008. The situation in Germany is “also good news”, Almunia said, after comparing the performances following the last Eurogroup meeting (see EUROPE 9519). Berlin would seem to be moving in the right direction to be able to meet its medium-term objective this year, in presenting a balanced structural budget.
He was critical of the performance of France and Italy, two countries where the deficit will remain the same as in 2007 (-2.6% of GDP and -2.3% of GDP respectively). The Commission, less optimistic than the French government, expects growth of 1.9% in 2007 and 2% in 2008. “There is certainly a positive element in terms of domestic demand, but we do not see an improvement in the external sector's contribution,” Almunia said. He will examine “in great detail” the French stability programme, which is due to be submitted by 1 December. “The final judgement on possibilities for improving these forecasts depends on the credibility and the reality of reforms which must be implemented,” he added. The Commissioner still has the same concerns for Italy. With the lowest growth (1.4%) and the highest debt in the euro zone in 2008 (102.9%), the country does not seem able to improve the quality of its public finances. (A.B.)