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Eurozone economy remains robust with downside risks on rise

The eurozone economy remained robust while downside risks increased due to the recent financial turmoil and possible slowdown in the United States, the European Commission said on Thursday.

“After a slowdown in the Q2, growth in the euro-area economy is expected to remain robust during the H2 of the year,” the commission said in its Quarterly Report on the Euro Area. Compared to the previous quarter, the eurozone economy grew by 0.3% in the Q2, slowing from 0.7% in the first three months and falling short of expectations. It was the slowest growth pace since the beginning of 2005.

The commission had projected a 0.6% increase for the second quarter in its spring forecast. The commission said the slowdown was due to weakened construction activity, which shrank by 1.6%, and declining investment, which dropped for the first time in five years. Investments decreased by 0.2% in the Q2 after expanding 2.0% in the Q1. In the Q2, growth was driven mainly by private consumption, which was supported by a strong labor market. Despite the appreciation of euro, the eurozone recorded strong exports in the Q2, which increased by 1.1%, up from 0.8% in the Q1.

Thanks to robust but softening world trade, the contribution of net exports to growth turned positive, the commission said. Describing the slowdown in the second quarter as a growth hiccup, the commission said it reflected to a large extent exceptional weather conditions and statistical effects but might also be a sign that the eurozone business cycle is maturing. Economic fundamentals in the euro zone remain strong and growth is projected to stay robust during the second half of the year, said the commission, which projected 2.5% growth for this year in its interim forecast last month, 0.1 percentage point lower than its forecast in May.

Meanwhile, the report said downside risks have clearly increased due to the financial turmoil and the possibility of a sharper slowdown in the US, a major trading partner with the 13-nation bloc sharing the same currency, the euro. Financial markets have experienced a period of serious turbulence in previous weeks caused primarily by the deterioration of the US subprime mortgage market. The turbulence has spilled over to the global financial markets. Investor confidence has been undermined by the emergence of exposures in unexpected locations and central banks in the US and the euro zone have been forced to step in. The overall impact of the financial turbulence on growth in the euro zone should remain moderate in 2007, since not only eurozone economic fundamentals continue to be strong but the economy has also become more resilient to shocks, the report said. (