13/09 E.U. Raises Growth Forecast for 2010

September 13, 2010
E.U. Raises Growth Forecast for 2010
By MATTHEW SALTMARSH
PARIS — The European Commission lifted its growth forecast for the region significantly on Monday in the wake of strong output data during the second quarter, and said that the recovery was starting to broaden across sectors.

In the latest of its twice-yearly economic forecasts, the commission predicted a growth rate for 2010 of 1.7 percent in the 16-nation euro area, and 1.8 percent for the 27-member European Union. Those were upward revisions of around three-quarters of a percentage point compared to the last forecast in May.

It stressed that the recovery was uneven across countries; the upgrade was based on new more positive assessments of France, Germany, Italy, the Netherlands, Poland, Spain and Britain, which account for about 80 percent of the Union’s gross domestic product.

This unevenness reflects differences in production structures, the scale of adjustment challenges and ongoing rebalancing within the E.U. and euro area.

But it added that the recovery was broadening “across sectors and demand components.” In particular, it noted a better contribution of private investment and consumption to growth in the second quarter of 2010, exceeding the combined contributions of inventories and net exports.

“This rebalancing is encouraging, especially as the weaker external environment in the second part of the year is set to have a dampening effect on E.U. export growth,” the report said.

It noted, however, that financial markets were still fragile, having recovered only partly from the tensions experienced in the spring, when investors fled certain European bonds, fearing defaults.

Overall, the new assessment appeared to help bolster European markets. The broad Euro Stoxx 50 index and the FTSE 100 in London both added 1.1 percent after midday. The euro advanced to $1.2812 from $1.2678 late Friday. Yields on benchmark euro-zone government bonds pushed higher — including those of Germany — suggesting that investors retain fears about sovereign risk.

The commission stressed that the pace of growth would moderate during the second half, reflecting the softening of the global economy and the fading of the temporary factors that kick-started the recovery. It forecast a 0.5 percent expansion in the E.U. and euro area in the third quarter, and 0.4 percent for the third quarter followed by 0.3 percent in the fourth.

“The European economy is clearly on a path of recovery,” the economic and monetary affairs commissioner, Olli Rehn, said. “The rebound of domestic demand bodes well for the job market.”

Going forward, financial stability and fiscal consolidation are the priorities, he said.

The commission presented a picture of still-benign inflation, forecasting a 1.8 percent rate this year for the Union and 1.4 percent in the euro area. Those forecasts were little changed from May.

Just as the outlook in Europe appears to be improving, the global picture is worrying some analysts and policy makers.

Jean-Claude Trichet, president of the European Central Bank, said Monday that while growth in emerging markets is strong, it remains subdued in the developed countries.

At a news conference in Basel, Switzerland, he repeated that he does not expect the advanced economies to slip back into recession, and also that he does not see a significant risk of deflation.

Separately, the Organization for Economic Cooperation and Development said Monday that its July index of composite leading indicators pointed to “clearer signs of a moderation in the pace of expansion to last month’s assessment.”

The index is a collation of economic indicators that provides early signals of turning points in business cycles in advanced economies. It fell by 0.1 percentage point in July from June, when it also fell. During the three months before June, the index had risen.

In Canada, France, Italy, Britain, China and India there are stronger signals of a slower pace of growth in coming months, while there are also stronger signals that the expansion may lose momentum in Japan, the United States and Brazil, it said.

Additional reporting by Jack Ewing in Basel, Switzerland.

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About Uy Do

Banking System Analyst, former NTT data Global Marketing Dept Senior Analyst, Banking System Risk Specialist, HR Specialist
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