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Eurozone economy losing momentum

The eurozone economy is losing momentum after two years of strong recovery, with clear signs of marked slowdown mainly due to long-lasting financial turmoil and soaring oil prices.

In its spring economic forecasts released in April, the European Commission described the eurozone economic outlook as being “extremely uncertain,” but a sharp slowdown was almost certain despite an out-of-expectation performance at the beginning of this year. The latest figures from Eurostat, the European Union (EU)’s statistics office, showed the economy of the 15 countries sharing the euro grew by 0.7% in the Q1 of 2008 over the previous three months, up from 0.4% in the last quarter of 2007.

Although the eurozone economy managed to remain resilient in face of financial turmoil and record high oil prices, Luxembourg Prime Minister Jean-Claude Juncker, who also chairs the euro group, warned earlier this week that the economic growth in the euro zone would slow down markedly in the Q2. “Signs of economic slowdown are multiplying and the second quarter will be much less buoyant than the first was,” he said, “We are seeing this in (economic) confidence indicators.”

According to the European Commission, the eurozone economy was expected to grow by 1.7% this year, down from a remarkable 2.6% in 2007, while next year it would further decelerate to merely 1.5%, well below its potential. Nearly one year after the breakout of the US sub-prime mortgage market crisis last summer, the eurozone financial markets remained in turbulence as banks were reluctant to lend for fear of exposure to losses. The so-called credit squeeze undermined investors’ confidence. As a result, investment, a major driver for eurozone economic growth, is cooling. It was forecast to grow by less than half rate of last year. However, EU leaders noted at their June summit that international financial markets were showing signs of stabilization, adding the overall conditions remained fragile.

Compared to the financial turmoil, the rising inflation, pushed up by record high oil and food prices, became an increasing risk to the eurozone economy. Between September 2006 and February 2008, wheat prices in Europe increased by 96% and prices for dairy products by 30%, while world oil prices have risen five-fold in six years, refreshing records recently. Mainly due to high oil and food prices, annual inflation in the euro zone rose to 4% in June, the highest level since the European Central Bank (ECB) 12 years ago started collecting inflation data for the countries that began to use the euro in 1999, according to preliminary figures from Eurostat. It stood exactly twice as high as the 2% ceiling preferred by the ECB to maintain price stability, dampening consumption and threatening economic growth.

Figures showed producers’ and consumers’ confidence in the eurozone has fallen below its long-term average. Household expenditure, another pillar of the eurozone economic growth, was expected to grow by 1.4%, slowing down from 1.5% last year. The deceleration was partly offset by improving situation in the labor markets. As of April this year, the eurozone unemployment rate has dropped to 7.1%, the lowest since 1993. However, rising inflation and economic slowdown have put the Frankfurt-based ECB into a dilemma as to whether to raise its benchmark interest rate for the eurozone to maintain price stability since any further increase might be detrimental to the economic growth.

In face of stubborn price pressure, the ECB raised its benchmark interest rate by a quarter of a percentage point earlier this month to 4.25%, after keeping it unchanged for a year. From the outside, because of the US economic slowdown and the appreciation of the euro and other significant adverse factors, the euro zone is facing an increasingly severe external trade environment.

According to the commission, the eurozone export growth this year was expected to drop from last year’s 6.1% to 4.4%, despite support from China and other emerging markets. Eurostat data showed in the Q1 of this year, the eurozone exports to China maintained a double-digit growth. (Xinhua)