Research Dept. News
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Monthly Report, num 292 - June 2006
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European Union - European Commission forecasts
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Moderate growth along with high uncertainty
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European Commission forecasts increase in economic activity in 2006 giving way to moderate slowdown in 2007…
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In its Spring forecasts, the European Commission has come out with its pronouncement: the often looked for but much delayed economic recovery in Europe is finally happening. According to the EU executive, this year the European Union (EU-25) will grow by 2.3% year-to-year (1.6% in 2005) to later decrease its drive slightly with a projected rise in gross domestic product (GDP) of 2.2% in 2007. The Euro Area will follow this cycle with growth of 2.1% in 2006 and 1.8% in 2007. In 2005, growth recorded in the Euro Area was 1.3%.
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…thanks to better state of investment and foreign demand.
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What will be the engines of this growth? The same as those showing up in recent months: investment will increase and exports are moving into a stage of higher growth. Following this drive we should see a recovery of private consumption although the growth rate will be more contained.
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So far we have looked at the good news. Now we shall examine some less promising factors. The first threat to carrying out this relatively benign scenario is the much-mentioned upturn in oil prices. The European Commission, in an effort to make amends for previous predictions, this time around is assuming that the energy picture will continue to be complicated in coming years. For this reason, its forecasts for the per barrel price of Brent quality oil are 69 dollars in 2006 and 71 dollars in 2007.
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Foreign risk (oil) and domestic risk (uncertainty about German economy) key factors.
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In spite of this, the European Commission estimates that the inflationary effect will be negligible. Harmonized inflation for the Euro Area at annual average will hold at 2.2% in 2006 and 2007. While it is true that up to now evidence of «second round» effects (that is to say, of the shift of increases in energy prices to other types of prices) is lacking, the European Commission forecasts look a little like wishful thinking.
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A second disquieting factor the EC executive raises is the impact of the tax package Germany has adopted. The uncertainty arising from the carrying out of a broad range of budgetary consolidation measures could change the expected pattern of recovery with effects not only restricted to the German economy.
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Recovery of Euro Area confirmed with growth of 2.0% in first quarter.
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This look ahead is especially relevant if we take into consideration that under the umbrella of recovery of the European Union as a whole we may find hidden substantially different national situations. In the group of the four countries in the Euro Area to grow below the average in 2006 we discover the three large economies, namely Germany, France and Italy, along with Portugal. This adds a factor of disquiet, given that, if the «big boys» should perform below expectations, it will be difficult for the other economies to avoid the downward drift of the whole group. It is in this context of a lack of counterweights to a potential slack in these three economies that we can understand concern in the EC with regard to Germany.
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