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The European Union’s economic growth has slowed to zero fuelling fears of a slide towards recession, already confirmed in EU heavyweight Germany. But the European Commission has maintained its forecast of a tentative recovery in the second half of the year. The EU reiterated that gross domestic product (GDP) should grow by between zero and 0.4 per cent in the second and third quarters, saying that the “fog of war” after the Iraq conflict was clouding the latest data.
According to Eurostat, GDP growth slowed to zero in both the 12-country eurozone and the 15-member EU in the first three months of 2003, compared to the previous quarter. But the figures confirmed that two countries - Germany and the Netherlands - are already technically in recession, having suffered two successive quarters of zero or negative growth. Germany’s GDP contracted by 0.2 per cent, the Netherlands by 0.3 per cent and Italy by 0.1 per cent, according to the Eurostat estimates, based on preliminary data.
Eurostat put first quarter year-on-year growth in the euro zone - excluding Britain, Denmark and Sweden - at 0.8 per cent and at 1 per cent in the full EU. Most indicators used in the model for this horizon reflect slack growth in terms of both domestic and foreign demand. Low confidence in the US and only tentative signs for domestic confidence among other factors put a drag on this forecast at this stage.
The commission is still banking on recovery later in the year, including in Germany, Europe’s biggest economy. The average (forecast growth) for the year for Germany at the moment is valid, as are all our average forecast for 2003. The commission’s previous forecasts had been based on an assumption that the Iraq war would end before the summer, which turned out to be the case. The commission also reiterated that the recent surge in the value of the euro is good news, despite the fact that it puts a drag on exports. Overall, the effects of the correction of the euro have been positive and a strong euro is in the interests of the euro area and the global economy.
Germany is faced with a period of stagnation amid signs the rapid strengthening of the euro is already making life hard for exporters in the euro-zone’s largest economy. This warning came on May 21 from the Bundesbank, which said there was no reason to expect an economic upswing in the foreseeable future. The central bank indicated it would soon revise down its gross domestic product growth forecast of 0.5 per cent for 2003.
The grim outlook came as euro-zone industrial production figures underlined growing fears that economic weakness in Germany could drag the rest of the euro-zone into recession. Eurostat said factory output in the 12-nation block plunged 1.2 per cent in March, more than double economists’ expectations. It was the first month-on-month fall this year. Preliminary data last week showed the German economy, which grew by 0.2 per cent last year, contracted 0.2 per cent in the first quarter of this year after shrinking slightly in the final three months of 2002.
The Bundeshbank dismissed fears of a severe downturn in Germany but warned the outlook was sluggish. This flat trend can lead to reduced production without sliding into recession, it said. But there was no confidence about an upturn in the near future and there were signs of further weakening.
The fast and strong appreciation of the euro could be a another factor for slow economy. Combined with the sluggish growth among trading partners, it had impaired the competitiveness of exporters. Without doubt the export business has become more difficult. But Germany’s price competitiveness was near to its average. Economists, however, believe the euro’s strength, welcomed by European Central Bank officials, poses a significant threat to the eurozone’s hopes of a recovery. The strength of the euro, which is likely to cause revisions to ECB economic productions and result in inflation falling well below the ECB’s 2 per cent price stability ceiling, will be used to justify a rate cut in June.
The European Commission said it was satisfied with the German government’s efforts to reduce its budget deficit. The German government would meet the target of reducing the structural deficit by 1 per cent of GDP in the current year - in line with a decision taken by the EU finance ministers in January. With the country on the brink of recession after its economy contracted in the first quarter and with growth hobbled by a surging euro, economists warned that Germany might be in danger of slipping into deflation. Economists said the threat of deflation, defined as a sustained decline in prices that discourages buying and stalls growth, had growth because of the strong euro. It is set to further depress the export sector, which underpins German growth, and could lead to a contraction in German GDP this year.
Preliminary data showed the decline in inflation from 1 per cent to 0.7 per cent in May was largely on the back of falling oil prices, triggered by the end of the Iraq war. But economists said consumer goods prices were also falling sharply. Germany’s low inflation was likely to drive the euro-zone inflation rate below the European central bank’s 2 per cent stability ceiling, increasing pressure on the bank to cut interest rates. Lower inflation made it easier to pursue a less restrictive monetary policy. But economists said the ECB now had to cut rates by 50 basis points to 2 per cent to boost fragile confidence in the euro-zone.
