News Release
No. 67/03
October 29, 2003
EU COMMISSION ISSUES AUTUMN ECONOMIC FORECASTS FOR 2003-05
The weak economic performance observed in the euro
area and EU economies at the end of 2002 continued throughout the first half
of this year. Consequently, for a third consecutive year, growth is likely to
disappoint: the average growth rate is expected to be a mere 0.4% in 2003 in the
euro area (0.8% in the EU). However, with accommodative macroeconomic policy conditions,
continued disinflation, supportive financial conditions, progress in structural
reforms and a reduction in geopolitical uncertainty, the confidence of economic
agents is returning and the international environment is improving. In this context,
the momentum for recovery is expected to pick up in the second half of 2003 and
to gather pace throughout 2004. A rebound to average growth rates of 1.8% for
the euro area and 2% for the EU is projected next year, approaching 2.5% in 2005.
This is underpinned by a recovery in consumer expenditure, supported by growing
external demand, and a consequent recovery in investment. Despite this projected
recovery, the protracted period of sluggish growth has taken its toll on the performance
of the labor market and employment growth is expected to be sluggish, registering
only 0.3% in 2004 and a somewhat better 0.8% in 2005.
Incipient global recovery
After the contraction in
world trade in 2001 and the weak growth in 2002, the future now looks brighter.
The sluggish growth in foreign trade projected for this year is deceptive, since
it is affected by the poor performance in the first half of the year. It should
accelerate from around 4.4% in 2003 to between 7 and 8% in 2004-2005.
World GDP growth is projected
at 3.3% in 2003, up from last year's 2.8%. It should increase to a robust 4.1%
in 2004 and 2005. This acceleration is supported by a number of factors, including
accommodative macroeconomic policies and supportive financial conditions partially
linked to further disinflation and a return of confidence, that originates from
reduced geopolitical tensions and strength in asset markets.
Looking ahead to 2004, the base for world growth is widening, with strong and
rising contributions coming from Asia
(particularly China), the US, Australia
and the acceding
countries. In the US,
helped by monetary and fiscal policy stimulus and solid underlying productivity
growth, the recovery is expected to continue with growth at about 2.8% in 2003,
rising to 3.8% in 2004. This will bring GDP growth above potential. Nonetheless,
in 2004, both the general government deficit and the current account deficit are
expected to widen to 5.5% and 5.6% of GDP, respectively.
The
economic outlook for growth in Asia
remains buoyant with growth at 6.7% in 2004-2005. Prospects for Japan
have also improved with a sharp upward adjustment of growth to 2.6% in 2003, although
deflation is set to continue, albeit at a lower pace, and the general government
deficit is expected to exceed 7% of GDP throughout the forecast period. After
stagnation in 2002, Latin America is expected to recover moderately, benefiting
from currency depreciation, a pick-up in the world economy and the gradual resolution
of the financial crises, which hit several countries in the region. Growth is
expected to regain momentum around the end of 2003 in Canada. Also in the countries
preparing for accession on 1
May 2004, continued strong growth is expected throughout the forecast period,
supported by domestic demand and structural change.
Diminishing oil prices and recovering stock markets
The oil price assumptions
suggest a gradual decline from a high of USD 31 (Brent crude) in mid-October to
yield an average of USD 28.3 per barrel for the year as a whole. A further easing
is assumed over the next two years, to USD 25.6 per barrel in 2004 and USD 24.1
per barrel in 2005.
Since mid-June, equity prices have stabilized and government yields have bounced
back fairly sharply, though the latter remain low by historical standards. With
lower risk premia and accommodative interest rates, financing conditions in the
global economy have improved compared to last year. This should help to promote
recovery particularly by facilitating a de-leveraging of the corporate sector
in both the United States
and the European Union.
The euro area and EU economies failed to gather momentum in the first half
of 2003
Following its poor performance in 2002, the euro area economy stagnated in the
first half of 2003, while the EU registered a slight up-tick.
After a promising rise
in the first quarter of this year, growth in private consumption expenditure fell
back in the second quarter. Investment continued to decline during the first half
of the year, while the decline in inventories tapered off. Net exports exerted
a significant drag on growth for the three quarters up to the middle of 2003.
Government consumption became the main contributor to growth in the second quarter
of this year.
There are several reasons
behind this disappointing economic performance and the delay in the recovery that
was expected earlier this year. Confidence both on the consumer and business sides
at a global level was undermined by geopolitical tensions linked to the Iraq
war, which created uncertainties about the price of oil. For the euro area consumer,
this was exacerbated by uncertainties related to future labor and pension income
and the adverse wealth effects of the prolonged stock market decline. The pressure
on corporate profitability stemming from the over-investment of the late '90s,
the long slowdown, ongoing balance sheet adjustment and the increased cost of
external funds, resulting from the stock market decline, is likely to have led
to the postponement of investment plans.
Prospects of a turnaround in the second half of 2003, reaching potential growth
in 2004
Survey indicators have
been sending out encouraging signals for the prospects of a recovery since April
of this year. According to these indicators, the services sector is leading the
way. Within services, the return of confidence is more gradual in retail trade.
The purchasing managers' index entered expansive territory in July and has now
regained the highs of early 2002. Consumer confidence is showing slow-but-steady
signs of improvement, although households remain relatively cautious where major
purchases are concerned.
Indicators for manufacturing
suggest that the recovery is less well established in this sector. Nevertheless,
leading indicators, such as the business climate indicator and the purchasing
managers' indicator for the manufacturing sector, have improved. Taken together,
these indicators suggest that a recession has been avoided and that the turnaround
is in progress at present.
Given low interest rates
and a stronger exchange rate, the source of growth should be the domestic rather
than the external side. Part of the projected recovery in household and business
spending in the coming months stems from the historically low interest rates,
both short-term and long-term. This has contributed to an easing of the balance
sheet constraints on households and businesses through a reduction in debt servicing
costs. The rebound in stock markets since March of this year and the buoyant housing
markets in some member states have also helped to partially restore wealth lost,
following the bursting of the stock market bubble.
The real disposable income
of households has received a boost from lower inflation, which will intensify
as inflation declines further. The positive real income effect is supported by
the appreciation of the euro and the ensuing terms of trade effect, which should
be more visible in the medium-term.
While the average growth
in the euro area remains limited to 0.4% in 2003, it is projected to rise to 1.8%
in 2004 and 2.3% in 2005 (0.8%, 2% and 2.4% in the EU, respectively). The upturn
is driven by a recovery of domestic demand, supported by rising foreign demand,
starting in the second half of 2003. This is, in turn, expected to trigger an
acceleration of capital formation during the course of 2004.
A
less favorable labor market performance
In the initial phase of
the slow growth period, employment held up quite well and the rise in the unemployment
rate remained limited. The relative stability of employment in the services sector
partially explains this result. Possible additional factors include labor hoarding
and more flexible labor contracts. However, with the prolongation of the downturn,
a less favorable picture is emerging. In 2003, some 200,000 jobs (in net terms)
are expected to be lost in the euro area, the first decline since 1994. The unemployment
rate is forecast to increase to 8.9% (8.1% in the EU). Given the sluggish recovery
and persisting rigidities, very little job creation is foreseen for next year.
Since the growth of the labor force is expected to exceed employment growth, the
euro area unemployment rate will continue to rise to 9.1% in 2004 (8.2% in the
EU), before edging downwards in 2005.
Inflation is starting to ease
Despite the economic slowdown,
headline inflation remained sluggish in 2003, buoyed up by such temporary factors
as the pass-through of oil price increases, weather-induced food price hikes and
rises in indirect taxes. Compared to 2.3% in 2002, headline inflation is expected
to remain at 2.1% on average in the euro area this year, before falling to 2%
next year and 1.7% in 2005. Core inflation was also rather sticky during 2003
as a result of sluggish productivity growth and the slow pass-through of the effects
of the euro appreciation into production and consumer prices. However, the reduction
in unit labor costs, as labor productivity picks up, and wage moderation should
also lead to a fall in core inflation in the medium-term.
Further deterioration of the general government deficit in the euro area with
considerable differences across member states
From 2.2% in 2002, the general
government deficit in the euro area (1.9% in the EU) is expected to widen to 2.8%
of GDP in 2003 (2.7% in the EU). Compared to the Commission Spring
Forecast of 2.5% for the euro area, this implies a worsening of the general
government position in all countries except Belgium, Spain, Austria and Portugal.
With
respect to 2002, the general government balance is expected to deteriorate this
year in all EU countries, excluding Belgium. Within this overall deterioration,
a number of country-groupings may be distinguished. The first group is composed
of two countries—Germany and France—which
are expected to exceed the reference value of 3% in 2003, having already been
in this position in 2002. The second group includes those countries whose deficit
has deteriorated this year and/or is projected to be close to the reference value:
Italy, the Netherlands, Portugal and the UK. The third group consists of those
countries where the deficit is forecast to remain below 1¾% of GDP in 2003: Greece,
Ireland, Luxembourg and Austria. The final group contains those countries, which
are still expected to post a surplus in 2003: Belgium, Denmark, Spain, Finland
and Sweden.
In 2004, a slight improvement
is expected for the euro area with the general government deficit declining to
2.7% of GDP (2.6% for the EU). Three countries (Germany, France and Portugal)
are, nonetheless, projected to exceed the reference value of 3%. In 2005, the
deficit of the euro area is expected to remain at 2.7% of GDP (2.4% for the EU).
This is a result of the expected acceleration in GDP growth, since the forecast
for 2005 is carried out on the basis of a “no policy change” assumption. Bearing
in mind this assumption, four countries would exceed the reference value in 2005:
Germany, France, Italy and Portugal.
Balanced risks to the forecast
The North American and Asian
economies are sending out encouraging signals in support of a resumption in world
growth. A simultaneous acceleration of growth in all major regions of the world
would establish a mutually reinforcing growth momentum. However, long-standing
macroeconomic imbalances may hold back a sustained expansion of the US economy.
The Japanese economy is still in the early stages of recovery from its protracted
recession. Therefore, the international environment might turn out to be less
benign than assumed.
A renewed sharp appreciation
in the euro exchange rate could undermine activity mainly in the euro-area manufacturing
sector, especially in those member states that have recently depended on external
demand to generate economic growth.
The protracted nature of
the downturn, the uncertainties related to the Iraq war, and the balance sheet
adjustment in the corporate sector have sapped confidence, leading to the postponement
of consumption and investment plans. With the resumption of confidence, the release
of such pent-up demand would accelerate the return to potential growth.
Business confidence can
be positively affected by visible progress on structural reforms, as well as adherence
to the Stability
and Growth Pact framework. Finally, while geopolitical tensions have not disappeared,
they have diminished in recent months, thereby reducing uncertainty at a global
level.
Acceding countries: on average growth remained relatively resilient…
Despite a difficult international
environment, growth in the acceding countries remained solid at the end of 2002
and in the beginning of 2003. Growth was driven by exports and a pick-up in industrial
production, while private consumption remained robust and additional support was
provided by lower interest rates. Reflecting the situation at the world level,
investment was weak.
Average GDP growth is forecast
to be 3.1% in 2003, unchanged compared to the Commission Spring Forecasts and
representing an acceleration from last year's 2.3%. This compares favorably with
the disappointing growth performance of the EU, but the aggregate masks different
trends at the country level. Growth has been revised downwards for many countries
and is forecast to be slower compared to last year. The unchanged aggregate growth
figure is mainly accounted for by Poland, which is gradually emerging from two
years of slow growth. For this year, expected growth varies form 0.8% in Malta,
particularly affected by a fall in tourism due to global uncertainty, to 6.6%
in Lithuania, which is characterized by buoyant investment, and is expected to
accelerate, benefiting from EU enlargement, but employment creation remains low.
Stimulated by the recovery
in the EU and the prospect of enlargement, average growth in the acceding countries
is expected to accelerate to 3.8% in 2004 and to 4.2% in the following year. This
pattern is foreseen in all countries, except the Baltic States, where some slowdown
from high levels is projected. Increasing exports and strong private consumption,
complemented by a pick-up in investment, are the main drivers of growth.
Linked to the ongoing process of restructuring, employment is contracting in the
Czech Republic, Poland and Slovenia in 2003 and employment creation was relatively
low in the other countries, except Slovakia and Lithuania. Overall, the situation
is set to improve, but average employment creation remains subdued at 0.6% in
2004 and 1.1% in 2005. Consequently, the unemployment rate will continue to be
high at around 15% in 2005.
Subdued increase in headline inflation
Inflation, at about 2.5%
on average, fell significantly in 2002 and a few acceding countries experienced
even falling prices during a certain period, as a consequence of strong productivity
gains. In 2003, average inflation is expected to remain close to the levels observed
in the euro area, but afterwards an acceleration to 3.5% in 2004 and 3.1% in 2005
is foreseen. Driving these developments are a return to the more normal situation
of rising prices, the liberalization of administrative prices and a hike of indirect
taxes. Underlying inflation should remain subdued as pressures from relatively
strong wage increases are compensated by productivity growth.
Current account deficits remain high
The average current account
deficit is forecast to stay at around 4¾% of GDP during the forecast period. This
is the combined result of the correction of a very high deficit in Estonia and
Slovakia and a slightly rising deficit in Poland and Latvia. Deficits remain relatively
high with little adjustment in the Czech Republic and Hungary.
Six countries are likely to have general government deficits in excess
of 3% of GDP in 2003
The average general government
deficit in the acceding countries is estimated to be 5% of GDP in 2003. Cyprus,
the Czech Republic, Hungary, Malta, Poland and Slovakia are expected to have deficits
above 3% of GDP. With the improvement of the economic situation and a tightening
of fiscal policy, the general government deficit is expected to decline in 2004
in most countries. A deterioration of the deficit is expected only in Poland (to
5.9% of GDP from 4.3%), in Lithuania (to 3.1% from 2.6%) and in Estonia (to 0.4%
from 0.0%). In 2005, the general government balance improves in all acceding countries.
Other candidate countries: further stabilization
The other candidate countries
will see a further stabilization in their macroeconomic performance. Growth is
expected to converge to around 4.5% - 5% per year in all three candidate countries
[Bulgaria, Romania and Turkey] over the forecast period. For Turkey, this would
mean a slowdown compared to the very strong 2002 growth performance, which was
however characterized by re-emergence from the deep crisis in 2001. Hence, over
the forecasting period, the growth performance will follow a more stable and sustainable
pattern. The slight deceleration in Romania in 2005 follows the strong boost to
growth expected in 2004, which is an election year. In Turkey and Romania, disinflation
should continue, driven by the trend real appreciation in these countries, a strengthening
supply side of these economies, driven by strong investment and, partly, more
prudent fiscal and monetary policies. Towards the end of the forecasting horizon,
inflation is seen at single digits in both countries and as in Bulgaria with already
quite low, but slightly accelerating, inflation.
In all three countries,
current account balances are expected to widen, driven by strong domestic demand
and slightly worsening price competitiveness of their exports on world markets.
More detailed information
on the forecasts is available in European
Economy, on the internet at:
http://europa.eu.int/comm/economy_finance/publications
/european_economy/2003/ee503en.pdf
Press Contacts: |
Anthony Gooch
202-862-9523
|
Maeve O'Beirne
202-862-9549
|
