EUROFRAME Economic Assessment of the Euro Area: Forecasts and Policy Analysis Autumn 2007
Press Release of September 29, 2007
In the context of the major caveat of high uncertainty, we forecast the economic expansion in the Euro Area to remain strong in the second half of 2007 bringing growth for the full year to 2.7 per cent and we expect it to slow moderately in 2008 and 2009 to around 2 ¼ per cent.
The economic upturn in the Euro Area lost some momentum in the first half of 2007. Quarterly real GDP growth in the Euro Area slowed to 0.3 per cent in the second quarter of 2007, down from a stronger than expected 0.5 per cent in the first quarter. However, there is an impression that actual economic developments in the second quarter could have been somewhat stronger than is implied by recent national account statistics.
For example, a continued strong expansion of economic activity in the Euro Area is suggested by the strong performance in the labour market. Employment grew by another 0.5 per cent in the second quarter, bringing annual growth to 1.7 per cent. Unemployment continued to decline steadily and fell to 6.9 per cent, down from 7.1 per cent in March and 7.5 per cent in December last of year.
Looking further ahead, the outlook is obviously clouded by the recent events in financial markets and the uncertainty about their impact on the real economy. It is difficult to assess at this juncture to what extent and for how long financing conditions for firms and household will be negatively affected and what impact the current developments will have on business sentiment and consumer confidence.
In the context of this major caveat of high uncertainty, we forecast the economic expansion in the Euro Area to remain strong in the second half of 2007 bringing growth for the full year to 2.7 per cent and we expect it to slow moderately in 2008 and 2009 to around 2 ¼ per cent.
As regards individual countries within the Euro Area, real GDP in Germany is projected to increase by 2.2 percent next year, followed by 2 percent growth in 2009. For France, the corresponding growth projections are 2.3 percent and 2.1 percent. For Italy, we are forecasting real GDP growth of 1.5 percent in 2008 and 1.7 percent in 2009.
We expect the US economy to grow by 1.9 percent this year and by 2 percent in 2008, both forecasts having been revised downwards since our Spring report. Our growth projection for Japan has also been revised downwards. We now expect growth of 2 percent this year and 1.7 percent in 2008.
In the general context of uncertainty in international financial markets, we consider the potential recessionary impacts of a banking crisis. Our hope and expectation is that the current crisis is a short-term blip in the liquidity of the banking sector. Our simulations suggest that the effects of such a “blip” on the potential output of the Euro Area would be quite limited. Hence we have not made major changes to our forecast for 2008. However, if a full-blown banking crisis were to develop, then we could see several years of stagnation. There would be the danger that even if such a crisis were to originate in the US, contagion would see it spread immediately to Europe. It is the task of the Fed, the ECB and the other European central banks to ensure that such a crisis does not happen.
The EUROFRAME – European Forecasting Network comprises ten of the most respected economic forecasting and research institutes in Europe, including the 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.
For example, a continued strong expansion of economic activity in the Euro Area is suggested by the strong performance in the labour market. Employment grew by another 0.5 per cent in the second quarter, bringing annual growth to 1.7 per cent. Unemployment continued to decline steadily and fell to 6.9 per cent, down from 7.1 per cent in March and 7.5 per cent in December last of year.
Looking further ahead, the outlook is obviously clouded by the recent events in financial markets and the uncertainty about their impact on the real economy. It is difficult to assess at this juncture to what extent and for how long financing conditions for firms and household will be negatively affected and what impact the current developments will have on business sentiment and consumer confidence.
In the context of this major caveat of high uncertainty, we forecast the economic expansion in the Euro Area to remain strong in the second half of 2007 bringing growth for the full year to 2.7 per cent and we expect it to slow moderately in 2008 and 2009 to around 2 ¼ per cent.
As regards individual countries within the Euro Area, real GDP in Germany is projected to increase by 2.2 percent next year, followed by 2 percent growth in 2009. For France, the corresponding growth projections are 2.3 percent and 2.1 percent. For Italy, we are forecasting real GDP growth of 1.5 percent in 2008 and 1.7 percent in 2009.
We expect the US economy to grow by 1.9 percent this year and by 2 percent in 2008, both forecasts having been revised downwards since our Spring report. Our growth projection for Japan has also been revised downwards. We now expect growth of 2 percent this year and 1.7 percent in 2008.
In the general context of uncertainty in international financial markets, we consider the potential recessionary impacts of a banking crisis. Our hope and expectation is that the current crisis is a short-term blip in the liquidity of the banking sector. Our simulations suggest that the effects of such a “blip” on the potential output of the Euro Area would be quite limited. Hence we have not made major changes to our forecast for 2008. However, if a full-blown banking crisis were to develop, then we could see several years of stagnation. There would be the danger that even if such a crisis were to originate in the US, contagion would see it spread immediately to Europe. It is the task of the Fed, the ECB and the other European central banks to ensure that such a crisis does not happen.
The EUROFRAME – European Forecasting Network comprises ten of the most respected economic forecasting and research institutes in Europe, including the 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.
