BRUSSELS, 19 April 2005 — Improving domestic demand underpinned quarterly growth of 0.5 percent in the euro zone in the first three months of the year, but mixed signals from business leaders is clouding the area’s economic outlook, the European Commission said yesterday.
The European Union (EU)’s executive arm said in a quarterly report: “The economy appears to have picked up in the first quarter of 2005 as domestic demand continues to improve in the euro area. “But as business surveys have been sending mixed signals, the underlying strength of the economy should not be overestimated,” it added.
After clocking up growth of 0.5 percent in the first quarter of this year compared to the last quarter of 2004, the euro zone would keep up the pact in the quarters ahead, the commission predicted.
The forecast was in line with rough estimates from the commission, which last week had put first-quarter growth in a range of 0.2-0.6 percent and 0.3-0.7 percent in the second quarter. Although euro zone exports continued to suffer from the strength of the euro, in the first quarter, private consumption was picking up. “In the remainder of the year, household purchasing power should benefit from decelerating inflation, a somewhat more supportive labor market and some return of confidence,” the commission predicted.
However, it warned that if a stronger labor market was essential for domestic demand to remain firm over the medium term. The commission has forecast the euro zone will have an unemployment rate of 8.8 percent this year and 8.5 percent next year.
Despite the improvement seen in domestic demand, the corporate sector was sending conflicting signals after a solid 0.5 percent increase in euro zone manufacturing output in January from December. “After a generally positive reading in January, most business surveys showed a setback in February and March, although in both industry and services they remain consistent with a continuation of moderate growth,” the commission said.
A recovery in euro zone investment was also a source of concern because it had not been as strong as would have been expected “in light of the prevailing sound macroeconomic fundamentals”. The two greatest risks to the euro zone economy came from volatility on the foreign exchange and oil markets.
The strength of the euro has been eating into the competitive edge of the areas exports while at the same time soaring oil prices have been holding back private consumption.
The commission blamed those two factors when it trimmed back its 2005 economic forecast earlier this month to 1.6 percent from 2.0 percent previously. Yesterday, the commission noted, however, that “a strong euro can partially shield the euro area from the increases in commodity prices” because the price of oil and other raw materials are largely denominated in dollars.
Meanwhile, Germany recorded growth of just over 0.2 percent in the first quarter of 2005, owing mainly to its export strength, but future prospects have worsened slightly, the Bundesbank said yesterday. “Gross domestic product rose slightly in the first quarter of 2005, in real terms and in seasonally adjusted terms, and more than compensated for the last quarter of 2004,” when GDP fell 0.2 percent, the German central bank said in its monthly report for April. “The rise in growth is once again explained by external demand, with exports rising greater than imports in the first two months.”