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Subject: [mobilize-globally] Economist outlook on european [e.u.]economy
Subject:
[RBG-Alliance] economist outlook on european [e.u.]economy
Date:
Thu, 1 Mar 2001 21:48:58 -0800 (PST)
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The European economy
Odd man out
Mar 1st 2001
>From The Economist print edition
THE worlds two biggest economies, America and Japan, seem to be
sliding
dangerously towards recession. Will the euro area follow them?
On the surface, the latest news is grim. In January, unemployment in
the euro
area rose for the first time in almost four years, to 8.8%. New
figures this
week also showed that Germanys GDP growth fell to an annual rate of
only 0.8%
in the fourth quarter of 2000, down from over 4% in the first half.
But other
economies within the euro area are still thriving. GDP in France and
the
Netherlands grew at annualised rates of between 4% and 5% in the
fourth
quarter. As a result, Euroland as a whole probably grew at a fairly
respectable
rate of around 2.5%. This explains why, unlike in America and Japan,
the
European Central Bank (ECB) has not felt the need to cut interest
rates.
An American recession would clearly dent growth in the euro area, but
by less
than in some other parts of the world. For a start, the euro areas
exports to
America amount to only 2.5% of its GDP, so even a sharp fall in
American
imports would have a limited impact on Europes overall output.
However, direct trade flows understate the influence of the American
economy.
In recent years European firms have built up large stakes in American
companies, and so a growing share of their profits depends on the
fortunes of
corporate America. Germany is particularly exposed. The sales of
American-based
affiliates of German companies are five times bigger than Germanys
exports to
the United States.
An American recession would also infect Europe through stockmarkets.
If
American share prices keep sliding, they will probably drag European
stocks
down too. The good news is that European consumer confidence is less
sensitive
to swings in share prices than American consumer confidence: Europes
households own fewer shares.
Economies in the euro area will also be cushioned this year by tax
cuts, worth
altogether a net 0.6% of GDP. These cuts were planned long before talk
of
recession surfaced in America; the timing, you could say, turned out
to be
fortunate.
Last, but not least, another reason for hoping that the economies of
the euro
area will hold up is that they do not suffer from the same sorts of
imbalances
that threaten to turn a mild American downturn into a recession. In
Europe,
household saving rates have remained fairly high, and private-sector
borrowing
has been relatively modest.
Measures of business and consumer confidence signal only a mild
slowdown this
year. Since last October the average prediction for growth in the euro
area in
2001, in The Economists poll of forecasters, has fallen from 3.1% to
2.6%;
this compares with estimated growth of 3.4% last year. Over the same
period the
average forecast for America has plunged from 3.5% to 1.8% (see
chart).
Deutsche Bank estimates that even if GDP growth in America is zero
this year,
the euro area would grow by 2% all the same.
The blame for the slowdown seen so far in Europe cannot be pinned on
the United
States. Rather, the main culprit is weaker consumer spending following
a
squeeze on real incomes. In the year to December, the volume of retail
sales
fell in Germany, France and Italy. Real wages in the euro area have
actually
fallen over the past year. Inflation has risen, but wage growth has
remained
relatively modest, thanks to increasingly flexible labour markets.
Growth in the euro area is almost certain to outpace growth in the
United
States this year. Many Europeans will be pleased about that, but in
fact there
is little room for complacency. The rise in Januarys unemployment
may turn
out to be a blip; if not, a weaker jobs market would soon dampen
consumer
confidence.
While growth has remained robust, the ECBs main concerns have been
inflation
and a weak euro. Headline inflation in the euro area fell in January
to 2.4%,
but remains above the ECBs ceiling of 2%. Core inflation, which
excludes food
and energy, rose to 1.6%. Until core inflation stops rising, the ECB
is likely
to be in no hurry to cut ratesunless, that is, growth suddenly
falters.
After regaining about 15% against the dollar between last October and
early
January, the euro has since slipped back. If it resumes its climb,
that would
probably encourage the ECB to cut rates, in order to prevent a
tightening in
overall monetary conditions. If America really does go into recession,
the euro
might well climb strongly against the dollar. That would further
squeeze the
euro regions exports, making an interest-rate cut more urgent.
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