Brussels, 28/04/2008 (Agence Europe) - The new economic forecasts from the European Commission do not contain any real surprises. Unveiled on Monday 28 April, the spring forecasts are counting on growth of 2% in 2008 and 1.8% in 2009 from 2.8% in 2007 (1.7% and 1.5% in the euro area from 2.6% in 2007). Forecasts about economic activity are therefore slightly down but the situation is barely different to that forecast a few months ago with the intermediate February forecasts (EUROPE 9607).
This scenario was largely expected given the current uncertainties about the world economy and the turbulence on the world financial markets making it more fragile, in addition to the sharp slowdown in growth in the US and price hikes for oil and food. The Commission says that the EU economy is holding up relatively well thanks to sound fundamentals and is expected to create 3 million new jobs in 2008-2009. On the other hand, a more worrying aspect involves consumer price inflation, which is expected to surge temporarily to 3.6% this year in the EU against 2.4% in 2007 before coming back down to 2.4% next year (equivalent figures for euro area are 3.2% and 2.2% versus 2.1% in 2007).
These economic forecasts are very much due to continued external turbulence and the marked slowdown in the United States. US growth is expected to stabilise around 0.9% this year and 0.7% in 2009 (as opposed to 2.2% in 2007). Soaring prices in basic products and the continued flattening off in world growth (expected to fall to 3.8% in 2008 and 3.6% in 2009) are other questions to tackle. The Commission believes that the impact on the European economy of these phenomena is difficult to assess and uncertainty as the scale and extent of the credit crunch will persist until the end of the year, before fading out in the first half of 2009.
Joaquín Almunia, Economic and Monetary Affairs Commissioner explained that there is no disagreement about the biggest problem, inflation. Headline inflation increased significantly since the autumn to reach 3.8% in March, in annual terms, in the EU (3.6% in the euro area). This reflects a sharp increase in global energy and food prices partly cushioned by the stronger euro. In view of this, the Commission is now forecasting average inflation rises this year compared to last November, where they reached 2.4% in the EU and 2.1% in the Euro zone compared to February when they reached 2.9% and 2.6% respectively. After peaking in the second quarter of 2008 in the EU, inflation is nevertheless expected to come down to lower levels to 2.4% in 2009 on average (2.2% in the euro area).
Mr Almunia said that the slowdown in the European economy will be less than in other economies. He said that we would continue to have positive growth and a gradual return to our potential. Quarterly developments demonstrate the resilience of the European economy. After a bad second quarter (0.2% in growth), Euro zone output is expected to resume in the second half of 2008 (with an average quarterly growth rate of 0.4%, followed by 0.5% and 0.6% over the first and second half of 2009).
The impact in business activity, however, is quite apparent. Investment growth is running out of steam due to overvalued real estate and the credit crunch. In the Euro zone, annual investment growth is therefore expected to fall to 2% in 2008 and 1.2% in 2009 (as opposed to 4.3% in 2007). Almunia explained that export growth would slacken off due to international developments affecting growth and the rise in the value of the Euro. The Commission is counting on oil prices being around $100 the barrel and a Euro exchange rate equal to $1.55 in 2008. The rate of employment is expected to continue its decline reaching 6.8% in the EU and 7.2% in the Euro zone this year (as opposed to 7.1% and 7.4% respectively in 2007. Following the marked improvement in 2006-07, employment rates are expected to decline by half the 2008 rate from 1.7% in 2007 to 0.8% this year and 0.5% next year. Despite the labour market situation, wage growth is expected to increase from 2.9% in 2007 to 3.8% this year, temporarily stimulated by catching up measures, particularly in Germany. It is then expected to fall to 3.5% next year. At the same time, labour productivity will remain at 1.2% in the EU and 0.9% in the Euro zone. In the area of public finances, the effect has almost been immediate with an interruption to general consolidation. Almunia explained that figures would remain low but less than in 2007. Despite significant differences between member states, public debt was on average less than 1% of GDP in 2007 in the EU and even 0.6% in the Euro zone, which constitutes a record level. In 2008, the average deficit level is again expected to climb to 1.2% in the EU and 1% in the Euro zone.
Only six European countries are currently subject to an excessive debt procedure but the Commission finds the situation in other countries worrying. After having brought down their deficit levels to 1.9% and 2.6% respectively in 2007, Italy and Portugal will leave the procedure soon. However, these two countries' trajectory in 2008 is again rising at level of 2.3% and 2.2% (2.4% and 2.6% in 2009). Almunia confirmed that France's situation is the most worrying in the Euro zone. France has a deficit of 2.9% this year and is scraping the Stability and Growth pact ceiling. A situation that will not change if the policy remains the same and leads Paris to broach this limit in 2009. the Commissioner explained that France is again dangerously close to the reference value, “a very clear case in which we can envisage the use of instruments available to us in such cases”.
The situation has improved for the four countries subject to procedure. The Czech Republic, Poland and Slovakia has seen the deficit come down to under 3%: 1.6%, 2% and 2.2% respectively. If the Zech and Slovak deficits are still to be reduced in 2008 ( to 1.4% and 2%), that of Poland is expected to rise again to 2.5%, warns the Commission. It is expected to propose excessive deficit procedures against Prague and Bratislava on 7 May and a little later against Warsaw (likely to be 11 June). After making a lot of effort, Hungary has reduced its deficit from 9.2% in 2006 to 5.5% in 2007. Budapest is expected to be able to maintain its deficit at 4% this year before bringing it down to 3.6% in 2009. Romania, is not involved in any procedure but is dangerously close to the limit. From 2.9% in 2008 (as opposed to 2.5% in 2007, the Romanian deficit is expected, without additional budgetary consolidation procedures to reach 3.7% in 2009, warns the Commission. After reaching 2.9% in 2007, the worsening public finance situation in the UK is being borne out given that the UK deficit is expected to reach 3.3% in 2008. This slide is expected to lead to the Commission proposing on 11 June, the opening of a new procedure against London a year after having closed the previous one. (A.B.)