« Lessons From The Good News From Brazil | Main | Mr. Greenspan On The Future Of Energy Prices »
April 05, 2005
The EC Downgrades Growth
Surging oil prices, which reached a new peak on Monday and the strong euro have forced the European Commission to cut substantially its forecast for eurozone growth this year, heightening fears about the slowdown's global impact.
The commission said it expected eurozone growth of just 1.6 per cent in 2005, compared with its forecast last October of 2.0 per cent and the 2.0 per cent estimated growth in 2004.
Among the more dramatic downgrades, the Commission expected growth of only 0.8 per cent this year in Germany, compared with 1.5 per cent forecast previously, and 1.2 per cent in Italy, after 1.8 per cent. The forecast for the UK was unchanged at 2.8 per cent.
The Wall Street Journal fills in this detail (subscription may be required):
The commission based its forecasts on an average oil price for 2005 of $50.90 a barrel and an exchange rate of $1.32 per euro.
The WSJ article also notes that the Germans are not completely convinced.
Stefan Giffeler, a spokesman for German Finance Minister Hans Eichel, said the government is sticking by its 1.6% forecast. Economic think tanks in Germany generally have predicted about 1% growth.
The Italians, on the other and, apparently are:
[Monetary Affairs Commissioner Joaquin] Almunia was particularly harsh in discussing Italy, blaming the government's lackluster efforts for a 1.2% GDP-growth forecast for 2005 and criticizing its "very low" economic growth and "very high debt." He also called Rome's 2005 budget plans "worrying." Italy's prospect of overhauling its economy any time soon grew remote as Prime Minister Silvio Berlusconi suffered a setback in regional elections this week, with the center-left opposition appearing to have snatched away six regions.
But "New Europe" is looking pretty good...
A bright spot for Europe has been the EU's former Soviet bloc members, which continue to be the EU's most rapid growth engine. Poland's economy is expected to expand by 4.4% in 2005, Hungary's, 3.9%, and Latvia's is expected to grow 6.4%.
... and the EC's longer-horizon forecast has things picking up, sort of. Again from the FT article:
At the same time, Joaquin Almunia... was upbeat about EU growth over the next two years...
The Commission also foresaw an acceleration in employment growth, which was “expected to create 3m new jobs in the EU during 2005-06”. But it admitted that the increase would be explained by an increase in the labour force as the improved economic situation brought more people back into the market. The eurozone unemployment rate would remain at 8.8 per cent this year, before falling to 8.5 per cent in 2006. Labour productivity would fall from 1.4 per cent in 2004 to 0.9 per cent this year.
UPDATE: General Glut comments on the connection of this news to the dollar exchange rate.
April 5, 2005 in Energy, Europe | Permalink
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef00d8346f302469e2
Listed below are links to blogs that reference The EC Downgrades Growth :
Comments
Posted by:
spencer |
April 05, 2005 at 08:10 AM
While I have been quite pessimistic short term on Eurozone prospects, I tend to agree with the view that prospects ought to be more upbeat 2 years out.
Another aspect of the EU forecast is quite interesting to me as it directly relates to the Becker-Pozner post below, namely the very rapid growth experienced by Poland and the Baltic members of the EU. It seems to me that many people visiting this blog may not be fully aware that levels of income per capita are still very low in former East European members of the Union, compared to levels of Western European nations. There undoubtedly is an element of catch-up going on, which we already witnessed in the eighties and nineties for Portugal, Spain and Greece.
Ireland was, I suspect, that plus something else: namely massive unrequited transfers from the EU members and the establishment of tax-free zones enabling it to exploit very specific comparative advantages. For instance, the availibility of very well trained - Dublin university - technicians and engineers as well as easy access to extremely clean waters from the Atlantic ocean were undoubtedly a factor in the decision of Pharma companies to gather on the western coast of Ireland.
Now, as far as eastern Germany is concerned, I fully agree with the post above. We all knew that the conversion rate for the Ost Deutschemark was wrong, badly wrong, and we have historical precedents to show to us that this sort of thing does not go away easily. I would still point out in strong defence of then Chancellor Kohl that a one-to-one exchange was an absolute political necessity for nation building, and that this was rightly overriding all other considerations.
Posted by:
godement |
April 05, 2005 at 09:02 AM
Note the contrast between the east & old East Germany. At the time of the reunion many economists believed that the merger of East and West Germany at an unrealistic exchange rate would haunt Germany for years.
It looks like they were right to worry.