BRUSSELS, 7 October 2005 — The euro zone economy is emerging from a second-quarter soft spot and is heading for growth of 1.2 percent this year, although high oil prices could yet stunt the nascent recovery, the European Union’s executive commission said yesterday.
The 12-nation group’s economy chalked up growth of 0.3 percent in the second quarter from the previous quarter, when the economy expanded at a rate of 0.4 percent, the commission said in a quarterly report.
“Economic growth in the euro area slowed slightly in the second quarter of the year, reflecting stagnation in private consumption and continued sluggishness in investment spending,” the head of the commission’s economics department, Klaus Regling, wrote in an editorial in the report. “However, there are good reasons to be optimistic about the prospects for an acceleration in economic activity in the second half of the year,” he added.
The report predicted that growth this year was likely to be 1.2 percent when extrapolating from quarterly figures for the first half of the year and quarterly estimates for the second half. That estimate is lower than the commission’s official 2005 forecast of 1.6 percent, which was made in April and looks increasingly outdated as it is higher than most other forecasts by both private and public economists.
Regling told a news conference that the commission’s updated official forecast, due to be published in November, was “very likely” to “be close to” the 1.2 percent estimate given by crunching the quarterly data.
A network of European economic think tanks, Euroframe-EFN, produced a report yesterday that also predicted growth this year of 1.2 percent and estimated that the rate would pick up to 1.8 percent next year. However, clouds of uncertainty hang over the euro zone’s outlook mainly in the form of soaring oil prices.
Preliminary estimates suggest that inflation in the euro zone spiked up to 2.5 percent in September from 2.2 percent the previous month, which Regling said was “entirely due to the oil price increase.” Economists have been looking for signals that soaring oil prices are having a knock-on effect on other prices and wages, which could drive both headline and underlying inflation higher.
But Regling said “we ... see no second-round effects, which is very important and very different from the past.” At a monetary-policy setting meeting in Athens, the ECB president Jean-Claude Trichet said he was not currently preparing the financial markets for an increase in interest rates. “On the basis of our regular economic and monetary analyzes, despite renewed upward pressure on prices stemming mainly from oil market developments, we have concluded that the monetary policy stance still remains appropriate,” Trichet said, after the ECB left its main interest rate steady at 2.0 percent.
The commission said in the report that oil prices were likely to remain “above 60 dollars in the medium to longer term,” the current price level on international markets. Regling warned that while “the impact on growth has been remarkably small” to date, if oil prices rise further “confidence might deteriorate.”
But trying to look on the bright side of the oil price hike, the commission said that euro zone exporters were enjoying strong demand from oil producers, whose coffers are overflowing thanks to the oil price boom. The commission also warned that euro zone growth was threatened by global economic imbalances, which are driven by the huge US current account deficit and reflect massive and unsustainable borrowing from abroad.
The European Commission forecast a 1.6-percent growth in euro zone GDP (Gross Domestic Product) in the second half of 2005 but said high oil prices continued to drag down the economic performance of the currency bloc.
“High oil prices have taken their toll on the euro zone economy and remain a major source of uncertainty in the short-term,” warned the commission in its third quarterly report on the euro area.
After economic growth of 0.4 percent of GDP in the first quarter of 2005 and 0.3 percent in the second, the commission — which is euro zone watchdog as well as the executive arm of the EU — said there were some signs that recovery in the euro area would gather momentum in the second half of 2005.
Business confidence is strengthening, industrial production has picked up and the world economy has emerged from the soft patch of the beginning of the year, it said.
