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02.03.2000 15:36

EU economy set to hit the accelerator

Joachim Schmidt Kommunikation
Rheinisch-Westfälisches Institut für Wirtschaftsforschung e.V.

The member institutes of EUREN - the EURopean Economic Network - see the European Economy as all set for a buoyant, and sustained, upswing. During the second half of 1999, growth rapidly gained momentum, boosted by the dynamic world economy, especially the powerful recovery in Asia and unexpectedly strong US demand. And the weak EURO also helped turn the tide over the last year. However, the upturn doesn't just rely on trade. Consumer spending is on the up, as confidence rises with falling unemployment, and investment is picking up too, driven by higher capacity utilisation and still relatively low interest rates. The fact that the upturn is widespread across all of Europe should also ensure that it gathers pace. Conditions are ripe for a sustained period of higher growth, so it's not surprising that forecasts are suddenly looking much more rosy. Domestic demand should remain strong, backed by a healthy financial position with low debt, while trade looks set to move into yet higher gear as the upswing in Asia and other emerging market economies has further to go even if US demand begins to ease back. In fact, as Europe typically exports a large proportion of investment goods, it should profit even more from the later stages of Asia's recovery, as the shift in Asian imports from basic and consumer goods to investment goods certainly hasn't peaked out yet.
As COE, the Centre d'Observation Economique de la Chambre de Commerce et d'Industrie de Paris stated, the French economy started to recover in the second quarter of 1999 and accelerated further in the second half, leading to annualized growth of around 4% at the end of the year. On top of rising exports that have been spurred by the dynamic world economy and the EURO depreciation, there has been steady growth in domestic demand, originating from both companies and households. Capital investment was supported by the optimistic attitude of firms, itself partly a result of buoyant external demand. On the other hand, households are clearly feeling the effects of the improved labour market, which explains the exceptionally high level of the consumer confidence indicator. French GDP should easily see growth of between 3% and 3.5% in 2000, after an average rate of 2.8% in 1999.
According to the RWI, the Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Essen, the German economy gained new impetus in the second half of 1999 after the weak performance since last winter that led to an annual average growth of 1.4% in 1999. With the global crisis overcome, main impulses came from abroad. Domestic demand - comparatively robust in view of the crisis - finally also increased. The prevailing situation of relatively favourable cost and financial conditions give reason for the brighter outlook - they boost internal demand, that, together with exports continuing to grow fast, will lead to an average GDP growth of 2.6% in 2000.
The Centro Studi Confindustria sees a positive turn in Italian performance, too. After GDP growth (a meagre 0.8%) disappointed in the first six months of 1999 (practically flat on the level of the former semester), in the third quarter, the economy expanded by a more robust 1.2% compared to the previous year. The acceleration of the Italian economy is being driven mainly by exports and investment. The former is receiving a boost from growing world demand, the latter reflects an improving business climate, helped by the lagged effects of the fall of real interest rates and the recovery in the construction sector. Italian GDP is now expected to grow by about 2.4% in 2000.
London Business School/Oxford Economic Forecasting reports that UK economy is firing on all cylinders. It has entered the new millennium at a gallop, with GDP growth expected to accelerate to 3.25% in 2000 from just under 2% in 1999. Encouragingly, this bullish outlook does not just reflect the continuing boom in the service sector and consumer spending. Manufacturing output and exports are also recovering healthily, despite the strong pound. Output is expected to rise by 2.5% this year, having been flat in 1999. However, with the labour market looking increasingly stretched, there is a danger that wage inflation could rise sharply, pushing interest rates to at least 6.5% by the summer. Fears that productivity growth will be unable to match the higher pay claims and that the pound could simultaneously tumble, adding to inflationary pressures, will keep both monetary and fiscal policy tight.
All in all, the EU economy is looking even stronger than expected at the end of 1999. At the same time, inflation remains low and the EUREN institutes do not see much risk to price-stability in the Euro-area. The stronger pick up in European consumer price indices over the last few months can be explained by rising oil prices and technical factors: it does not necessarily mirror any longer-term inflationary pressure. In this context, the US-experience should be considered. The long and inflation-free upswing of the American economy suggests that the increasing use of information technology, deregulation of markets, opening up to competition and the expansion of services rather than manufacturing might (amongst other factors) favour a situation in which low unemployment is compatible with low inflation (i.e. a lower NAIRU). Therefore, even over a long upswing, the danger of inflation may remain low and the ECB does not need to raise rates for domestic reasons. Nevertheless, external risks, especially the oil prices, remain virulent in 2000.

EUREN was founded in June 1999 to meet the increasing need for European-wide economic understanding. The participating institutes are:
Centre d'Observation Economique de la Chambre de Commerce et d'Industrie de Paris
Centro Studi Confindustria, Rome
London Business School-Oxford Economic Forecasting
Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Essen.

Ihre Ansprechpartner zu dieser Veröffentlichung:
Dr. Roland Döhrn, Tel.: -262
Joachim Schmidt (Pressestelle), Tel.: -292

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