EU Growth Shows A Mixed Picture

Thursday, July 14, 2005

Economic growth in the European Union has picked up a little in the first quarter of 2005, Eurostat reports (pdf). Both Euro zone and EU25 GDP grew by 0.5 percent quarter-on-quarter after a rate of 0.2 and 0.3 (EU25) percent in the previous quarter. But a year-on-year comparison shows that GDP growth slowed in the Euro zone to 1.4 (1.5) percent whereas growth in the EU25 slowed to 1.6 (1.9) percent. Eurostat traced the slowdown to slowing private consumption and decreasing investments.
The bright spot in the overall picture comes from imports falling faster than exports. Exports rose most strongly in Germany with a plus of 2.9 percent. A minus of 9 percent in Polish exports and 18 percent in Polish imports may point to severe structural problems in the country formerly hailed for its dynamic economy.
As Europe suffered from the double whammy of rising oil prices and the rising dollar, which is the accounting currency for oil purchases, the outlook for the second quarter has darkened significantly. EU authorities have already announced earlier that annual growth in 2005 will come in well below 1.5 percent. The OECD has projected 1.2 percent growth in 2005.
Euro zone inflation outlook worsens
UPDATE I: ECB chief economist Otmar Issing said late Tuesday evening that the inflation outlook in the Euro zone has deteriorated in the past month, suggesting there is no room for a rate cut. Issing said, "the outlook for prices has clearly worsened since June," Bloomberg reported. Rates were still appropriate in his view and no obstacle to growth, rather quite the opposite, he said. Issing said the chance that inflation will slow below the ECB's limit this year has become "less probable," backing away from the bank's June forecast that the annual rate of price increases would be just below 2 percent.
Issing also said the outlook for growth has improved since the start of June. German and French business confidence rose last month as the Euro's 11 percent decline against the dollar this year boosted export prospects and European manufacturing activity rose from a 22-month low.
ECB Sees Positive Impact On Exports From High Oil Prices

UPDATE II: The ECB sees a positive impact from the high oil prices though. In its latest monthly report (pdf), published today, it noted that OPEC- and CIS-countries did not stash all their oil revenues in bank accounts but started importing more goods.
From the monthly report:
Total OPEC and CIS imports registered an annual average increase of 18% and 22% respectively between 2001 and 2004 in nominal dollar terms. During this period, OPEC and CIS imports increased more than their long-run income and price elasticities of imports would suggest. The euro area seems to have benefited from the strong demand originating from oilexporting countries. The annual growth of OPEC and CIS imports from the euro area was, on average, 22% and 34% respectively between 2001 and 2004, resulting in an increase in euro area market shares in both oil-exporting regions (see table below). China also succeeded in increasing its relative share in total OPEC and CIS imports. These figures contrast sharply with those of the United States, which experienced a significant loss in market share in OPEC and CIS imports.

OPEC/CIS Imports from the EU
Overall, from 1999 to 2004, different patterns emerged as to how oil-exporting economies, in particular the OPEC economies, allocated their additional oil export revenues. First, in the aftermath of the substantial rise in oil prices in 1999, OPEC countries deposited large shares of their oil revenues with international banks, keeping their investment in financial assets and import spending low. However, between 2001 and 2004, OPEC economies increased their imports substantially. A similar increase in import activity since 2001 can also be observed in the case of the CIS economies. It appears that the euro area benefited from this recent rise in imports. Thus, while the elevated price of oil certainly dampens economic activity in oil-importing countries such as the euro area, it appears that the mitigating feedback effects associated with oil-bill recycling have been somewhat more favourable for the euro area in the current oil price cycle than in previous episodes of price increases.


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