Economic Assessment of the Euro Area: Forecasts and Policy Analysis Spring 2007
Press Release of March 29, 2007
The EUROFRAME – European Forecasting Network comprises ten of the most respected economic forecasting and research institutes in Europe, including DIW Berlin. On behalf of the European Commission, it produces bi-annual reports on the Euro Area covering economic forecasts, regular policy monitoring and special policy topics.
Today sees the launch of the network’s report for Spring 2007. Among the findings contained in the report are the following:
GDP growth in the Euro Area was 2.8 percent in 2006. This was higher than had been anticipated for much of 2006 and is well above the growth rates of recent years.
For 2007, the network expects GDP growth in the Euro Area of 2.5 percent. For 2008, we expect the growth rate to be 2.2 percent. The reasons for the marginal slowdown between 2006 and 2007/08 include the following:
The growth rate in the US is expected to fall from 3.3 percent in 2006 to 2.4 percent in 2007 and to 2.3 percent in 2008;
An appreciation of the euro relative to the dollar is expected, in response to diverging interest rate paths and the large and on-going current account deficit in the US;
The ECB is expected to raise its key interest rate again in 2007, although only one further increase is expected;
Restrictive budget policies are expected to remain in place in many Euro Area countries as governments continue to deal with fiscal deficits.
Inflation in the Euro Area is expected to fall to 1.8 percent in 2007, partly in response to lower energy prices and despite the increase in VAT in Germany. In 2008, inflation is forecast to rise slightly to 2 per cent.
The improvement in the economic environment in the Euro Area has been reflected in the labour market and this is expected to continue. The rate of unemployment is expected to fall to 7.2 percent in 2007 and to 6.8 percent in 2008. The improving labour market is expected to contribute to an increase in consumption, with growth rates of 2.1 percent an
The report contains an analysis of possible adjustment in the US to its current account deficit and the likely consequences for the Euro Area. The analysis shows that an adjustment that is domestic to the US (such as a house price fall) has a much smaller impact that an internationally-based adjustment, such as a dollar depreciation.
Furthermore, the report contains a detailed analysis of the relationship between growth, employment and unemployment. Among the core themes discussed are the following:
Over the past decade, the trend increase in unemployment has been arrested in the Euro Area. Labour market performance has improved significantly for older workers and for women (due to more part-time jobs), but not for younger people and the low skilled.
This picture masks large differences across countries. Fast growing economies were able to reduce unemployment rates rapidly during the last decade, in particular Ireland, Spain, Scandinavia and the United Kingdom. Unemployment in Germany and France, on the other hand, remained stubbornly high.
In the context of immigration, simulations using NiGEM for the UK suggest that a gradual rise in the labour force of ¾ per cent over 2-3 years leads to a temporary increase in unemployment of ¼ percentage point for a few years, with unemployment gradually disappearing as/if wages adjust. It is an open question whether low-skill wages will react given minimum wage regulations.
Increasing the employment-intensity of growth cannot be considered as a useful long-run strategy since it is the flip-side of poor productivity growth. However, temporary employment-intensive growth, induced by social security or other structural reforms, is welfare enhancing if it reduces structural unemployment.
GDP growth in the Euro Area was 2.8 percent in 2006. This was higher than had been anticipated for much of 2006 and is well above the growth rates of recent years.
For 2007, the network expects GDP growth in the Euro Area of 2.5 percent. For 2008, we expect the growth rate to be 2.2 percent. The reasons for the marginal slowdown between 2006 and 2007/08 include the following:
The growth rate in the US is expected to fall from 3.3 percent in 2006 to 2.4 percent in 2007 and to 2.3 percent in 2008;
An appreciation of the euro relative to the dollar is expected, in response to diverging interest rate paths and the large and on-going current account deficit in the US;
The ECB is expected to raise its key interest rate again in 2007, although only one further increase is expected;
Restrictive budget policies are expected to remain in place in many Euro Area countries as governments continue to deal with fiscal deficits.
Inflation in the Euro Area is expected to fall to 1.8 percent in 2007, partly in response to lower energy prices and despite the increase in VAT in Germany. In 2008, inflation is forecast to rise slightly to 2 per cent.
The improvement in the economic environment in the Euro Area has been reflected in the labour market and this is expected to continue. The rate of unemployment is expected to fall to 7.2 percent in 2007 and to 6.8 percent in 2008. The improving labour market is expected to contribute to an increase in consumption, with growth rates of 2.1 percent an
The report contains an analysis of possible adjustment in the US to its current account deficit and the likely consequences for the Euro Area. The analysis shows that an adjustment that is domestic to the US (such as a house price fall) has a much smaller impact that an internationally-based adjustment, such as a dollar depreciation.
Furthermore, the report contains a detailed analysis of the relationship between growth, employment and unemployment. Among the core themes discussed are the following:
Over the past decade, the trend increase in unemployment has been arrested in the Euro Area. Labour market performance has improved significantly for older workers and for women (due to more part-time jobs), but not for younger people and the low skilled.
This picture masks large differences across countries. Fast growing economies were able to reduce unemployment rates rapidly during the last decade, in particular Ireland, Spain, Scandinavia and the United Kingdom. Unemployment in Germany and France, on the other hand, remained stubbornly high.
In the context of immigration, simulations using NiGEM for the UK suggest that a gradual rise in the labour force of ¾ per cent over 2-3 years leads to a temporary increase in unemployment of ¼ percentage point for a few years, with unemployment gradually disappearing as/if wages adjust. It is an open question whether low-skill wages will react given minimum wage regulations.
Increasing the employment-intensity of growth cannot be considered as a useful long-run strategy since it is the flip-side of poor productivity growth. However, temporary employment-intensive growth, induced by social security or other structural reforms, is welfare enhancing if it reduces structural unemployment.
