Economic Forecasts: Sharp Downward Revision of Growth Forecasts for 2005

Article excerpt

Further rises in oil prices, uncoordinated exchange rate adjustments and a further drop in consumer confidence are among the principal risks weighing on the spring forecasts. The basic hypothesis used by the Commission puts oil prices at 50.9 dollars a barrel in 2005 and 48 dollars in 2006. A further increase in the cost of oil would put negative pressure on forecasts, according to the Commissioner. Regarding euro-dollar exchange rates, the forecasts are based on an average rate of 1.31 dollars for a euro in 2005 and 1.32 dollars in 2006.

The Commission's optimism for 2006 relies on stronger domestic demand and, especially, a sustained acceleration in investment. Private consumption is also expected to recover more gradually over the forecast horizon. The main factors behind this outlook include accommodative macroeconomic policies, continued wage moderation and low inflation, supportive financial conditions, widening of profit margins, and progress in structural reforms leading to a restoration of confidence among consumers and entrepreneurs.

Employment.

Total employment growth is set to accelerate to 0.7% in 2005 and 0.8% in 2006, compared with an estimated 0.5% in 2004. The Commission is anticipating the creation of three million new jobs in the EU during 2005-2006. In spite of this increase, unemployment is only expected to stabilise in 2005 compared to 2004, in both the EU and the euro-zone. The economic recovery will therefore have only limited impact on the labour market.

Deficits and debt.

The evolution of public finances in both the EU and the euro-zone will be limited. …