Eurozone ‘shows recovery signs’

THERE are tentative signs that the downturn in Europe’s economy is at an end and that an upturn, especially in the eurozone, is in sight.

However, the European Commission quarterly review, released in Brussels yesterday, underlined the dangers of a collapse in the housing market in a number of countries, including Ireland.

Property prices increased by 14.2% in Ireland last year which was second only to Spain at 17.4%. The report warned that household debt had increased mainly to fund house purchases, but added there were signs of a deceleration in house prices in Ireland over the past few months.

While good news from the US, Japan and the Asian markets are expected to help Europe's economy, hard data has begun to send out encouraging signals suggesting that the trough of the cycle has passed.

Economic and Monetary Affairs Commissioner Pedro Solbes said: "Following three years of low growth in the euro area, the first green shoots of recovery are appearing." After months of several of the eurozone countries being in technical recession, all sections of the economy have improved in the past few weeks. Since the spring, business confidence in services has strengthened steadily and there are early signs of an upturn in manufacturing, while consumer confidence is improving slowly but steadily and job loss fears are receding.

Decelerating inflation will also foster private consumption, while initial figures for inflation for September released yesterday show it remaining at 2.1% for the second month after a high of 2.4% in February.

The indicator-based quarterly GDP forecast for the euro area points to quarter-on-quarter growth for the third quarter of 2003 in the range of 0% to 0.4%. The European Commission's model suggests acceleration in the fourth quarter to a range of 0.2% to 0.6%. Based on the mid-range values, the average growth rate should be around 0.5% for 2003 as a whole.

The short-term outlook for employment remains sluggish, having come to a standstill since the second half of 2002. Unemployment generally has drifted steadily upwards over the past 20 months to 8.9% and has contributed to the drop in private spending.

Labour productivity has remained nearly flat on a quarter-to-quarter basis in the past two quarters, leading to a slight erosion of profit margins after a year of steady improvement.

Concerns about the health of the euro-area banking sector have diminished in recent months, according to the report that says euro-area banks are generally profitable and well capitalised and so are well-placed to support economic recovery.

The report analyses the impact of economic and monetary union (EMU) on trade and foreign direct investment (FDI) and finds it has boosted trade flows within the euro area and fostered cross-border FDI.