Financial turmoil, oil price to bring down European economic growth
Sunday, 11 November 2007
BRUSSELS, Nov 10 (Xinhua): The European economy was set to grow at a slower pace in the next two years as the financial turmoil and hiking oil prices began to bite, the European Commission said yesterday.
In an economic forecast released yesterday, the European Union (EU)'s executive arm revised down its projections for the economic growth in both the EU and the Eurozone in the next two years, citing the recent turbulence on the financial market, triggered by the sub-prime mortgage crisis in the United States this summer, and rising oil prices, which were approaching 100 US dollars per barrel, a level ever unimaginable.
Growth in the 27-nation EU is expected to decelerate from 2.9 per cent this year to 2.4 per cent in both 2008 and 2009, according to the commission. The new figure for 2008 was 0.3 percentage point lower than the commission's previous forecast made in May.
As to the Eurozone, the 13-nation bloc sharing the same currency euro, the economy will grow by 2.6 per cent this year, before slowing down to 2.2 per cent in 2008, also 0.3 percentage point lower than the previous forecast. The growth rate will drop further to 2.1 per cent in 2009.
"Clouds have clearly gathered on the horizon with this summer's turbulence in the financial markets, the US slowdown and the ever-rising oil prices. As a result, economic growth is becoming more moderate and the downside risks have clearly increased," said Joaquin Almunia, the EU Economic and Monetary Affairs Commissioner.
After a solid first half of 2007, the moderation going forward is partly explained by the impact of the turbulence in the financial markets, though the peak of the cycle may have already been behind the European economy before this summer's turmoil, the commission said.
Though the commission assumed in its forecasts that the financial distress would peter out gradually, the turmoil has already reduced investors' appetite for risk and has tightened financing conditions.
Investment has proven dynamic so far, but at this stage of the cycle it should moderate, the commission said.
On the prices front, inflation should remain moderate, but the risks are on the upside, due to further oil-price hikes and rises in food and commodity prices.
Inflation in the Eurozone is set to increase in the coming quarters as a result of higher commodity prices, but should fall back to around 2 per cent, a ceiling preferred by the European Central Bank, by mid-2008, the commission said.
The Eurozone annual inflation already shot up to 2.6 per cent in October, the highest level in more than two years. The surge was mainly blamed on soaring food prices and record-high oil prices, which reached a record 98.62 US dollars per barrel Wednesday.
Analysts said this would put the ECB in a dilemma as to whether to raise its eurozone benchmark interest rate since the Frankfurt-based bank had to take care of an economy already hurt by the financial turmoil and be cautious of any move which may lead to further appreciation of the euro against the US dollar.
The euro has gained 15 per cent against the dollar over a year ago, which makes European exports less competitive.
In its latest policy meeting, the ECB left its key interest rate unchanged at 4 per cent for the fifth consecutive month.
Meanwhile, the commission said a still benign global environment and solid fundamentals would limit the negative impact.
Private consumption, which is taking over as the main engine of growth, was expected to grow at a healthy pace, underpinned by relatively sustained employment growth.
In an economic forecast released yesterday, the European Union (EU)'s executive arm revised down its projections for the economic growth in both the EU and the Eurozone in the next two years, citing the recent turbulence on the financial market, triggered by the sub-prime mortgage crisis in the United States this summer, and rising oil prices, which were approaching 100 US dollars per barrel, a level ever unimaginable.
Growth in the 27-nation EU is expected to decelerate from 2.9 per cent this year to 2.4 per cent in both 2008 and 2009, according to the commission. The new figure for 2008 was 0.3 percentage point lower than the commission's previous forecast made in May.
As to the Eurozone, the 13-nation bloc sharing the same currency euro, the economy will grow by 2.6 per cent this year, before slowing down to 2.2 per cent in 2008, also 0.3 percentage point lower than the previous forecast. The growth rate will drop further to 2.1 per cent in 2009.
"Clouds have clearly gathered on the horizon with this summer's turbulence in the financial markets, the US slowdown and the ever-rising oil prices. As a result, economic growth is becoming more moderate and the downside risks have clearly increased," said Joaquin Almunia, the EU Economic and Monetary Affairs Commissioner.
After a solid first half of 2007, the moderation going forward is partly explained by the impact of the turbulence in the financial markets, though the peak of the cycle may have already been behind the European economy before this summer's turmoil, the commission said.
Though the commission assumed in its forecasts that the financial distress would peter out gradually, the turmoil has already reduced investors' appetite for risk and has tightened financing conditions.
Investment has proven dynamic so far, but at this stage of the cycle it should moderate, the commission said.
On the prices front, inflation should remain moderate, but the risks are on the upside, due to further oil-price hikes and rises in food and commodity prices.
Inflation in the Eurozone is set to increase in the coming quarters as a result of higher commodity prices, but should fall back to around 2 per cent, a ceiling preferred by the European Central Bank, by mid-2008, the commission said.
The Eurozone annual inflation already shot up to 2.6 per cent in October, the highest level in more than two years. The surge was mainly blamed on soaring food prices and record-high oil prices, which reached a record 98.62 US dollars per barrel Wednesday.
Analysts said this would put the ECB in a dilemma as to whether to raise its eurozone benchmark interest rate since the Frankfurt-based bank had to take care of an economy already hurt by the financial turmoil and be cautious of any move which may lead to further appreciation of the euro against the US dollar.
The euro has gained 15 per cent against the dollar over a year ago, which makes European exports less competitive.
In its latest policy meeting, the ECB left its key interest rate unchanged at 4 per cent for the fifth consecutive month.
Meanwhile, the commission said a still benign global environment and solid fundamentals would limit the negative impact.
Private consumption, which is taking over as the main engine of growth, was expected to grow at a healthy pace, underpinned by relatively sustained employment growth.