“Both the EU and the euro area are expected to grow markedly stronger this year.. But growing at, or slightly above, potential is not enough and some countries are far from exploiting their full potential. Europe must pursue the path of reforms, correct budgetary imbalances where they exist, and make room for expenditure on R&D, innovation and education where it is most needed. Only this way will the unemployment rate come down more,” said Joaquín Almunia, the Economic and Monetary Affairs Commissioner.
The Commission’s economic forecasts published today put economic growth at 2.3% in the EU and 2.1% in the euro area, i.e. around ¾ of a percentage point (pp) above last year’s growth and 0.2 pp higher than forecast six months ago. In 2007, growth is projected to be slightly lower at 2.2% in the EU and 1.8% in the euro area (see tables attached).
Economic growth in 2006 will be underpinned by a strengthening of domestic demand, particularly investment in equipment, which has been growing at 5% or more in both areas, compared to less than 4% in 2005, while decreasing slightly to around 4.5% in 2007. Exports will also continue to be supported by the strong expansion of the world economy and gains in competitiveness of EU companies in some Member States. The situation in Germany is also improving with growth seen at 1.7% (0.9% in 2005) this year, but declining temporarily to 1.0% in 2007. This growth profile is the result of the planned budgetary measures which, on average over the two-year period, are expected to be growth neutral.
Business investment drives growth
Output growth has been increasing since the second half of 2005 largely thanks to a rebound in investment. This can be explained by a return of business confidence, an improved profit outlook, benign financing conditions and an increased recourse to replacement investment following an extended period of restrained investment growth.
Investment is expected to be boosted further by an extension of the favourable conditions in 2006, before moderating in 2007. Private consumption will pick up as well, although the strength of the upturn in this case will be more modest as improvements in the labour market are gradual only.
Unemployment on a gradual downward path
Employment growth picked up gradually in 2005 and is expected to improve further especially in the services sector. Overall, the EU is expected to create 3.6 million new jobs over the period 2006 -2007, of which 2.4 million in the euro area.
The decline in unemployment will continue to be gradual, however, because of the traditional influx of persons into the labour force as the labour market improves. After peaking at around 9% in 2004 in both areas, the unemployment rate started to subside in 2005 reflecting, in particular, the beneficial effects of the structural reforms in both product and labour markets. It is expected to fall to just above 8% in 2007 in both EU and euro area.
The inflation front remained remarkably stable in 2005, at 2.2% in both the EU and the euro area, particularly in view of soaring oil prices. Although energy prices rose rapidly, core inflation declined, indicating that the oil price hike did not have any significant second-round effects. As the forecast assumes that such effects will continue to be largely absent, headline inflation is projected to stay just above 2% over the forecast period in both areas.
Public finances in 2005 turned out better-than-expected in the autumn. The positive surprise stems from lower-than-expected expenditure which more than offset lower revenues. Despite this overall improvement, seven Member States, including four euro-area members, were running a general government deficit of more than 3% of GDP, the ceiling set in the Maastricht Treaty. The general government deficit as a share of GDP is estimated to remain unchanged in 2006, at 2.3% in the EU and 2.4% in the euro area, before declining somewhat in 2007.
Global outlook remains bright, but risks persist
The revival of growth in the EU is supported by a vibrant global outlook. World growth is seen at 4.6% this year and 4.3% in 2007. Growth in the US, whilst easing, will stay at around 3% over the forecast horizon and Asia, excluding Japan, is expected to grow at rates above 7½%. Japan itself is expected to grow at 2.8% this year and 2.4% in 2007.
However, the external side also poses risks to Europe’s economic outlook. In particular, a disorderly correction of global current account imbalances remains one of the main downside risks.
The biggest near-term risk, however, lies with the oil markets. The very low spare capacities make markets extremely vulnerable to actual and potential supply disruptions. As the current high oil prices contain a significant risk premium due to geopolitical tensions, the oil price assumption of the forecast ($68.9 per barrel on average for 2006 and $71 per barrel for 2007) is subject to a considerable risk, both on the upside and downside.
The full Commission autumn economic forecasts