Brussels, 10/09/2008 (Agence Europe) - Faced with a slowdown in growth and continued high inflation, the European economy is stagnating. This observation comes as no surprise. It is based on forecasts published on Wednesday 10 September and illustrates significant differences in the seven main economies of the Euro zone and the EU as a whole. Oil and raw material price volatility is still the biggest risk to growth and inflation, even though the latter may peak towards the end of the year. The current context may also begin to impact on member states' public finances, although, at the moment, those facing the most threat reaffirm their commitment to budgetary consolidation.
For 2008, the Commission's Economic and Financial Affairs Directorate General now forecasts growth at 1.4% in the EU and 1.3% in the euro area, which represents a 0.6 and 0.4 percentage point (pp.) downward revision, respectively, compared to the spring forecast, due to financial turmoil deepening, commodity prices soaring and the shocks to several housing markets. In annual terms, growth will be less than half of that for 2007 (2.6% in the Euro zone and 2.8% in the EU27). Joaquín Almunia, Economic and Monetary Affairs Commissioner said that the first quarter had been excellent, the second, “worse than expected” and the scenario for the third is “zero growth” and the same for the fourth quarter. The slowdown in growth in each quarter has been spectacular even though some countries are doing better than others (Germany, Poland and the Netherlands).
Inflation is increasing in the Euro zone and EU27. Forecasts now see respective rates of 3.6% (+0.5 pp compared to last April) and 3.8% (+0.2 pp). This upward revision reflects energy and food price inflation since the spring forecasts. Inflation appears to have peaked, points out the Commissioner, who is remaining very cautious. Germany, Poland and the Netherlands' figures are quite close to their April figures, but in other member states there has been a sharp rise.
Germany. Almunia said that they were expecting a slowdown in the German economy (in the second quarter: Ed) even if the fundamentals remained sound. After having registered a fall of 0.5 in GDP in the second quarter, results in the third and fourth quarters will still be negative in Germany (-0.2), although the situation is better than in a lot of other neighbouring countries (1.8% growth in 2008, unchanged compared to forecasts for spring). As is the case for the other countries, inflation rates are beginning to go down in the fourth quarter of the year to reach an average of 3% compared to last year (as opposed to the 2.9% forecast in April).
Spain. According to the Commissioner, “the situation is a lot worse” than forecast, mainly due to the impact of the crisis in the construction and housing sectors, “the scoreboard is far from bring rosy for the third and fourth quarters” (-0.1% and -0.3%) so that the growth expected in 2008 will fall to 1.4% (as opposed to 2.2% in April. From 3.8% gauged in the figures for April, inflation is expected to hit 4.5%.
France. Third and fourth quarter growth will be similar (0% and 0.1%) to that annual average of 1% (as opposed to the previous 1.6%). Average inflation for 2008 will be 3.5% (as opposed to the previous 3%). Almunia said that he had received a commitment from the minister of finance, Christine Lagarde, on behalf of the France government, that it would respect the 3% deficit threshold in the Stability and Growth Pact, even if predicted figures for this year could be revised upwards (from 0.1 or 0.2 pp), he acknowledged.
Italy. A sad performance for the end of the year in Italy too. It is barely expected to reach positive growth in 2008 (0.1%). Inflation forecasts were re-evaluated at 3.7% for this year (as opposed to 3%). Mr Almunia indicates, according to his finance minister, Giulio Tremonti, that Italy will stick to the figures planned for budgetary consolidation.
Netherlands. Better growth than planned for the second half of the year, which will allow it to reach 2.2% in 2008 (as oppoed to 2.6% in April). This displays “high resilience” in the Dutch economy. The rate of inflation will reach 2.8% (as oppoed to 2.7% according to previous figures).
Poland. Quite good forecasts for Poland, whose growth will be around 5.4% (as opposed to 5.3% in April), despite a marked slowdown in the last two quarters of the year. Inflation is expected to reach 4.5% (as opposed to the previous 4.3%).
United Kingdom. Negative growth in the second quarter (-0.2%) will hamper the annual average (1.1% as opposed to 1.4% in April). Despite a rate of inflation that will remain high for the rest of the year, the 2008 average is expected to conform to that for the Euro zone (3.6% as opposed to 2.8% in the last forecasts. (A.B./trans/rh)