The European Commission Tuesday revised slightly down its forecast for economic growth in the eurozone this year, citing a weaker performance in the Q2 and the recent turmoil in the financial markets.
Based on an update for the seven largest member states in the European Union, the commission said in its interim forecast that the 13-nation bloc sharing the same currency would see economic growth of 2.5% in 2007, while the whole EU would grow at 2.8%. Both figures were 0.1 percentage point less than those predicted by the commission in its spring forecast in May, which mainly reflected a weaker-than-expected outcome in the Q2.
The European economies made a good start in the Q1 of this year with the GDP expanding by 0.7% quarter-on-quarter in both the euro zone and the EU, mainly driven by buoyant investment. However, the quarterly growth rate eased to 0.3% in the second quarter in the euro zone and 0.5% in the EU, falling short of expectations and signaling possible slowdown of the European economies after vibrant recovery last year. “Looking at these figures, we can conclude that maybe the peak of the cycle is behind us but we have still possibilities for a favorable situation in the coming quarters,” said EU Economic and Monetary Affairs Commissioner Joaquin Almunia.
In addition, the recent turbulence in the financial markets triggered by problems in the US subprime mortgage market during the summer has clearly increased the downward risks to the European economic outlook, the commission said. The turbulence has caused a disorderly re-pricing of risks in global assets markets. Uncertainty about underlying losses has resulted in an aversion for risk and increased corporate bond spreads as well as in a withdrawal of liquidity and higher volatility in several markets. Meanwhile, the commission said European growth was expected to continue due to sound fundamentals and a still favorable global environment. Almunia said “the sound economic fundamentals of the European economy will help weather the current financial turmoil.” “But the increased risks to the outlook require governments to hold steady to the reform and budgetary consolidation agenda, precisely to enhance the resilience of the EU economy,” Almunia said.
The report said domestic demand was expected to be a continuous main contributor to economic growth in both the euro zone and the EU, with output increasingly driven by private consumption supported by the persistent improvement in the labor market. The unemployment rate, which fell below 7% in both the EU and the euro zone during the summer, is now at levels not seen since the early 1980s. On the inflation front, consumer prices in 2007 were expected to increase by 2.0% in the euro area and 2.2% in the EU, both up by 0.1 percentage point compared with the spring forecast due to higher prices of commodities, including oil.
The commission’s interim forecast was based on updated figures from France, Germany, Italy, the Netherlands, Poland, Spain and Britain. The seven countries account for more than 80% of the EU’s GDP. According to the report, the economic forecast for France showed the biggest drop, down from 2.4% in the spring forecast to 1.9%. Economic growth of Germany, the largest economy within the EU, was revised down slightly from 2.5% to 2.4%. (people.com.cn)