Academic journal article National Institute Economic Review

Prospects for the European Union

Academic journal article National Institute Economic Review

Prospects for the European Union

Article excerpt

The slowdown in growth in the Euro Area now appears likely to be more pronounced than was originally expected at the start of the year. In particular the economic outlook for Germany has deteriorated considerably in the last few months. Annual inflation has also increased in Europe, driven upwards by sharp rises in the prices of food and energy goods. We now anticipate that GDP growth in both the Euro Area and the EU-15 will moderate to 2.1 per cent this year. In 2002 we expect to see some improvement and growth of about 21/2 per cent in both the Euro Area and the EU-15. Annual GDP growth is expected to be lowest this year in Germany at 1.3 per cent. Denmark, with growth of 1.8 per cent, and Austria and Italy, with growth of 2 per cent, are the only other countries likely to have growth lower than our forecast for the EU-wide average of 2.1 per cent this year. Growth for 2001 is likely to be highest in Ireland, at 7 per cent, in Greece, at 33/4 per cent and in Finland, at 31/2 per cent.

Signs that real activity will be weaker throughout Europe are now beginning to appear. Industrial production in the Euro Area fell by 1/2 per cent in April following a 0.3 per cent fall in March. The annual rate of growth has now slowed to 1.6 per cent from 8.3 per cent last December. Industrial production decreased in April in all categories of industrial goods and in almost all countries. Industrial production in the EU-15 fell by 0.4 per cent in April relative to March.

The European Commission economic sentiment indicator fell in June by 0.7 points in the Euro Area and by 0.4 points in the EU-15 and is now in line with the average level seen over the past decade. The largest decreases were in Germany, France, Austria and the Netherlands. The consumer confidence indicator also declined by 1 point in June in both the Euro Area and the EU-15. Our forecast is consistent with this survey evidence, with the growth of private investment in the Euro Area expected to slow to around 3 per cent this year from almost 5 per cent in 2000. We expect to see a recovery in investment spending towards the end of this year as financing costs become cheaper and growth prospects improve, with investment forecast to rise by 4 per cent in 2002.

Growth in external trade volumes is set to moderate this year, with export growth slowing in response to lower world demand and import growth easing because of slow domestic demand within the Euro Area. This slowdown has already begun to occur during the first three months of the year. There has been no growth in export volumes so far this year and import volumes are falling. Merchandise exports increased by only 0.1 per cent in the first quarter of this year. The volume of merchandise imports fell by 11/2 per cent in the first quarter.

The Eurostat standardised unemployment rate in May was unchanged from April at 8.3 per cent for the Euro Area and 7.6 per cent for the EU-15. A year ago the respective rates were 10.1 per cent and 9.3 per cent. The largest relative falls in unemployment over the last year were in the Netherlands, Sweden, Ireland and France. We anticipate that the average unemployment rate for this year will be around the current levels. Employment growth is likely to be subdued in the latter half of the year, with output growth being met through productivity gains. A modest upturn in unemployment may be seen in Denmark and Germany.

Harmonised consumer price inflation for the Euro Area increased further to 3.4 per cent in May. This was the highest annual rate seen since 1993-4. The increase in inflation has been caused primarily by rapidly rising prices for food and energy goods, along with the more widespread impact of the weak euro on import prices.

The food component of harmonised consumer prices rose by 5.9 per cent over the year to May as a result of adverse weather during the winter months and the effects of the BSE and foot-and-mouth crises on continental Europe. …

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