Brussels, 21/02/2008 (Agence Europe) - Threatened with a fall in growth and increased inflationary pressures, the European economy is delicately poised. This is the Commission's verdict as it published its new seasonal interim forecasts on Thursday 21 February. Growth was revised downwards (by a 0.4 percentage point) compared to figures for November 2007 (EUROPE 9540) and is expected to fall to 2% in the EU and 1.8% in the eurozone. Inflation is rising (by a 0.5 percentage point) and stands at an average of 2.9% in the EU and 2.6% in the eurozone (still in 2008).
On the basis of calculations for the 7 biggest economies of the EU (France, Germany, Italy, the Netherlands, Poland, Spain and the United Kingdom) which together account for 80% of the EU's GDP, the analysis illustrates that some of the downside risks identified in the autumn forecasting exercise - the ongoing financial turmoil, a sharp slowdown in the US, and high commodity prices - have materialised. Joaquin Almunia presented the new forecasts to the press, and explained that less good results than expected in the last quarter of 2007 and the low level consumer demand explain the slow down in growth. However, the commissioner for economic and monetary affairs was careful to point out that economic fundamentals in Europe remained solid. Despite the very uncertain global economic situation and constantly falling business confidence indicators, forecasts reveal a possible increase in growth in the second half of the year. From 0.3% in the first half of the year, GDP could increase to 0.4% in the eurozone. At this level, growth in the EU appears to be stabilising around 0.4% every quarter. Inflation is expected to return to normal during the last half of the year.
These prospects contain many uncertainties, insisted the commissioner, who said that the re-evaluation of risk, which began last summer on the financial markets, was not yet over. Similarly, the US is confronting a slow down in business activity but the Commission does not envisage a recession. With a recovery in the US economy at the end of the year, it is expecting a rise in US GDP to the tune of 1.25% on average for 2008. This performance will especially depend upon the effect of political and budgetary measures announced by the US government, added the commissioner. High prices for basic products will continue to impact on inflationary pressures in Europe. The Commission believes that the price of oil per barrel will be $90 in 2008 ($11 more than last November). Given the recent rise in the euro compared to the US dollar, the Commission is forecasting an exchange rate of $1.47 per euro.
Given the sharp price rises in foodstuffs and raw materials, the Commission has made some significant revisions to inflation rates in most member states. Although inflation remained contained at an average level of 2.3% in the EU and 2.1% in the eurozone in 2007, the Commission pointed out that it had risen steeply in the last half of the year. In January the inflation rate had reached 3.2% and pressure from producers began to increase. Prices for oil and food products contribute to more than half of total inflation in the eurozone, each accounting for 0.9 percentage points (the rest is due to inflation in other goods and services sectors). Commissioner Almunia said: “We hope to approach the European Central Bank's price objective (Ed: around 2%) by the end of the year” so that inflation gets back to around 2.5% in the EU and 2.1% in the eurozone in the fourth quarter of 2008.
The situation per country is as follows:
Germany. From 2.1% in the autumn forecasts, growth in Germany is only expected to rise to 1.6% in 2008. This fall is due to both the slower level of growth than expected in the last quarter of 2007, and a more cautious assessment of prospects for this year, stressed the commissioner. Germany is expected to see weak progress in its GDP rate (0.1%) in the first quarter of 2008, before a greater increase (0.3% in the second quarter and 0.4% for the rest of the year). Inflation was revised upward given that it was expected to reach 2.3% in 2008, as opposed to the previous 2%.
Spain. Growth remains sustained but domestic demand is showing weakness, indicated the commissioner. Evaluated at 3% last November, growth is expected to increase to 2.7% in 2008 (between 0.6% and 0.5% on a quarterly basis). The slow down in the property sector is largely responsible for this fall but exports are expected to partially compensate for this decline, explained Mr Almunia. Inflation has jumped by a 0.8 percentage point and stands at 3.7% over the year (4.4% in the first quarter).
France. The French economy will slow down in 2008, dropping from 2% growth according to previous forecasts to 1.7% (with 0.4% in the second quarter compared with 0.3% in the other quarters. This can be explained by a lower carry-over from 2007, a less favourable international environment and higher inflation which will reduce families' disposable income (although private consumption is likely to remain high), the Commissioner said. He added that this lowering of growth forecasts could lead to an increase in public deficit of around 0.15 of a percentage point. In terms of inflation, France, which appeared to be less affected according to previous forecasts (1.7% for 2008), could see price rises of 2.4% in 2008.
Italy. A very poor performance from the Italian economy, which sees its growth forecast halved (from 1.4% to 0.7%). Clear reduction in industrial output in the last quarter of 2007 will affect the first quarter of 2008, when GDP is likely to rise by only 0.1%. Unlike Germany, Italy will continue to suffer from a loss of confidence among economic players. Only a slight rally is expected during the year (0.2% in the second quarter and 0.3% thereafter), on condition that the international environment becomes less uncertain, the Commissioner said. From 2% in November, inflation could go up as high as 2.7%.
Netherlands. After very high growth rates in the last two quarters of 2007, the Netherlands is an exception. The Dutch economy will benefit in 2008 from the carry-over of this fine performance, even though it will not be sheltered from the global deceleration. For the year, the Commission has revised its forecast upwards, to 2.9% compared with 2.6% previously. The inflation rate, unchanged at 2.3%, will remain well below the euro area average, but will increase in the second half of the year (2.6% in the third quarter and 2.8% in the fourth, compared with 1.8% for the first half of the year).
Poland. Strong domestic demand will help the Polish economy. Although down by 0.3 of a percentage point on the autumn forecast, growth should reach 5.3% in 2008, the Commission says. It predicts a slight slowing in eh second half of the year (1%). Energy and food prices will push inflation levels up to 3.8% (one percentage point above previous forecasts).
United Kingdom. Performance was good in the second half of 2007, but signs of slowing are showing. The Commission, therefore, has reduced its forecast for growth in the UL economy to 1.7% of GDP in 2008, after it was 2.2% in November: a reduction that can be put down to tighter credit conditions and less good perspectives for the housing market, Almunia said. The level of inflation should settle around 2.5% (2.2% previously).
For the full report go to:
http://www.ec.europa.eu/economy_finance/thematic_articles/article12054_en.htm (A.B.)