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| August 12, 2002 | Monday | Jamadi-us-Saani 2, 1423 |
World economic report
Stock market weakness, concerns about the US outlook and two consecutive months of falling business sentiment are clouding the euro-zone economy’s prospects of staging a strong recovery in the second half of this year. Many private sector economists are lowering their growth forecasts for the 12-nation area as they assess the impact of a summer as turbulent in economic and financial developments as it has been in weather.
While no one is predicting an economic slowdown as severe as last year’s, let alone a recession, most say the euro-zone is likely to record its lowest annual growth this year since the euro’s launch in 1999. Latest forecasts range from 1 percent gross domestic product growth to 1.1 percent. Both are near the bottom of the European Central bank’s forecast in June that the economy would grow by 0.9-1.5 per cent this year.
The predictions disguise sharply different expectations for the region’s member states, with Greece, Ireland and Spain likely to maintain their impressive growth rates of recent years but Austria, Finland, Germany, Italy and the Netherlands struggling to meet the euro-zone average. In June and July, business confidence indices in Belgium, France, Germany and Italy - they account for three-quarters of euro-zone economic output - have all fallen. If sentiment falls further in coming months, fears of a double dip in both the French and euro area economics will rise significantly. Manufacturing activity in the euro-zone eased in July, suggesting that the region’s recovery from last year’s economic downturn may have reached its peak.
Over the past few months the euro-zone’s PMT has flattened off at a relatively early stage in the economic recovery. Recent falls in industrial confidence in the major euro-zone economies suggest there are growing risks to the economic recovery. The European Central Bank, decided on August 1 to keep its main interest rate unchanged at 3.25 per cent, where it has stood since last November. The bank has given no hint that it considers the risks to the euro-zone’s recovery to be serious enough to justify a rate cut.
Luxembourg is very small. It is the sort of place where the national accounts can be distorted by the purchase of a single aircraft. And yet Luxembourg, by some counts the richest place on each, has two basic fears related to getting bigger. The first is that the country will not be able to cope with growth - in infrastructure, financial and cultural terms.
Luxembourg keeps booming, despite the gloomy state of the world economy. GDP growth fell last year by 2.4 percentage points, but still average 5.1 per cent as private consumption was boosted by tax cuts introduced at the start of last year. The government’s target is for growth of between 3 and 4 percent of GDP in 2002.
Unemployment is a barely noticeable 2.5 per cent and employment rates continued to rise last year by more than 5 per cent. The public finances remain comfortably in surplus and are forecast to remain that way for the foreseeable future.
Luxembourg enjoys a large surplus. The only slight concern is an inflation rate of 2.7 per cent for 2001, although this seems set to dip below the magic 2 per cent mark in the second quarter of this year and stay there.
A normal economy growing at the sort of prolific rates enjoyed by Luxembourg would soon encounter labour shortages. However, so formidable is the country’s performance that it can look to the neighbouring regions in France, Germany and Belgium - themselves riddled with unemployment - for workers to fill the available jobs.
More than 90,000 people cross into Luxembourg every day to work in the Grand Duchy’s world famous financial sector, its service industries and the left-over heavy industries which were the original basis of its economic strength. Steel - through newly formed multi-national Arcelor - still accounts for a quarter of the value of Luxembourg’s export trade.
Luxembourg expects its population to grow from about 450,000 to around 520,000 by 2020. If things stay as they are, it could have between 700,000 and 800,000 inhabitants by 2050. Although the level of spending is already very high, we will have to increase our public spending in the infrastructure sector and in other investments.
Italy’s economy has averaged around 1.5 percent growth annually over the past 10 years (and 2 percent over the last five). It has passed on its 1990s role of EU growth laggard to Germany, and its growth rate is now moving broadly in line with the euro-zone average.
But although a recovery is expected in the second half of this year, there are still few signs that Italy’s economy is about to spring to life. The economy did not grow between June of last year and March of this year.
Gross domestic products, which grew by only 1.8 percent last year, is this year likely to grow 1 percent. Although the unemployment rate has shrunk from 12 percent to 9 percent during the past four years, economists fear there could be a reversal unless the economy picks up.
Government predicts growth of 2.9 percent next year and at least that rate in years ahead, whereas most economists view growth of 2.4 per cent next year as being more realistic. They note that Italy’s export-led economy is likely to be harder hit than most by the recent appreciation of the euro.
Government blames the effect of September 11 for putting that on hold. Despite rising business confidence this year, industrial output has failed to rebound as expected. Many economists agree that fiscal incentives could quickly propel Italy towards Spanish-style growth rates of 4 percent and more.
Consumer spending remains weak and the crisis at Fiat, the car and truck maker, is taking a toll on the economy as a whole. Fiat, the country’s largest industrial group, is attempting to sell numerous assets to offset huge losses at Fiat auto. Employment at large companies continues to shrink more slowly than needed because of the rigid labour laws.
The government says it will sharply reduce spending to pay for tax cuts and find sterling pound 12.5 billion of deficit-cutting measures. Tax cuts totalling at least sterling pound 6 billion will increase 2003 deficit target to 0.8 percent of GDP - against the 0.5 per cent ceiling agreed only a month before. It delays by two years Italy’s promise to the European Commission to balance its budget in 2003.
Despite an economic slowdown, Spain is still growing faster than its neighbours, with GDP forecast to expand 2.4 percent this year. Inflation and unemployment are in the rise again, Spanish companies have been rocked by Argentina’s financial crisis this year, and their exposure to Latin America - once seen as a competitive strength - has wiped billions of euros off their stock market value.
An exceptional confluence of circumstance allowed the economy to grow by an average 4 percent a year between 1997 and 2000. Growth was fuelled by monetary union, a rapid fall in interest rates, wage moderation, better fiscal management, and a buoyant international environment.
These driving factors have either run their course, or are no longer there - like the massive spending spree by people disposing of their ‘black pesetas” before the arrival of the euro. The challenge for policy makers is to find new motors for an economy that remains hamstrung by relatively high inflation, low productivity, a low educational level and the highest rate of unemployment in the EU.
Inflation threatens to erode Spanish competitiveness at a time when many manufacturers are considering decamping to eastern Europe, ahead of EU enlargement. Spain’s leading economic forecasters, the Flores de Lemus Institute at the Carlos III University in Madrid, Predicts inflation will reach 4 per cent by the end of the year. This is not good news for an economy the government says will grow by only 2.4 per cent this year. Fighting inflation is awkward now that Spain no longer controls its monetary or exchange rate policies.
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