Eurozone growth rate reduced to 0.4%

THE rate of growth for the 12-country euro zone area for 2003 has been reduced to a mere 0.4% from the dismal April prediction of 1%.

Even Ireland, traditionally one of the economic star performers of the EU, was looking less healthy, according to a report delivered by Economic and Financial Affairs Commissioner Pedro Solbes.

For the year as a whole, real Gross Domestic Product (GDP) growth in Ireland has almost collapsed to 1.5% from just short of 7% in 2002. However, last year’s healthy growth was something of an illusion, because of the exceptional performance of the chemicals and pharmaceuticals sector. Gross National Income (GNI) gives a truer picture of growth and it was well behind the GDP figure, the EU report points out.

Prospects for the next two years point to a broad-based recovery with annual growth of about 5% and a gradual rise in disposable incomes. The pick-up in investment does not extend to house prices that according to the report have peaked this year.

Unemployment that increased from 3.8% in the first half of 2001 to 4.75% in the third quarter of this year is expected to continue to rise to just over 5% next year and will level off at that for 2005 However there is little room for complacency as in assessing the risks the commission warns any strengthening of the euro on international exchange markets could threaten manufacturing growth, especially in member states that depend on external demand to generate economic growth.

They also underline Europe’s reliance on world markets to continue to recover but warn that the United States macroeconomic imbalances could hold back that country’s recovery, while Japan is still in the early stages of recovery from protracted recession.

“The international environment might turn out to be less benign than assumed,” warned Mr Solbes.

He admitted that, for a third consecutive year, growth is likely to disappoint with France and Germany continuing to depress the euro zone while growth in the three countries outside the currency will be 0.8%.

He blamed the continuing fears from the Iraq war, poor structural reforms, global sluggishness and inflation for Europe lagging so far behind the US, Asia, Australia and Japan in its recovery. With a gradual turnaround of these depressing factors, however, he believes the momentum for recovery is beginning to pick up and will gather pace in 2004. This will lead to average growth rates of 1.8% for the euro area and 2% for the EU next year, approaching 2.5% in 2005.

He believes a recovery in consumer expenditure and increasing demand for exports and consequent recovery in investment will underpin the recovery.

However this will not immediately show on the jobs front that has taken its toll over the past year with the net loss of jobs this year being the first decline in nine years. Employment will continue to remain sluggish with a growth of only 0.3% next year, increasing to 0.8% in 2005.

Inflation is starting to ease generally at 2.1% average in the euro area, falling to 2% next year and 1.7% in 2005. In Ireland inflation is expected to fall from 4.1% this year to 2.75% in 2005.