PARIS (MNI) – The Eurozone recovery continues at a modest pace,
driven largely by trade with the more dynamic emerging market economies,
which is expected to be boosted by the substantial recent decline of the
euro’s exchange rate, according to the European Central Bank’s quarterly
forecast survey published Thursday.
However, the 54 survey respondents found that increasingly
restrictive domestic fiscal policies, which will likely weigh on
consumption and investment, could dampen growth somewhat in the medium
term — though the impact will be temporary.
Not surprisingly, the survey also found that consumer inflation in
the euro area should be somewhat higher in the short term due to rising
commodity prices and a weaker euro. But that effect should be offset
over the medium term by easing core inflation, the ECB forecasters said.
The survey showed an average GDP growth forecast for this year of
1.1%, down marginally from the 1.2% forecast in the first quarter
survey, which was published in February. For 2011, the average growth
forecast was 1.5%, compared with the previous projection of 1.6%.
The average 2010 growth forecast was higher than the +0.8% midpoint
of the ECB staff’s own growth projections, published in March, though
those are likely to be revised upward next month. The average 2011
forecast was exactly the same as the ECB staff’s March midpoint.
On average, there was a slight upside risk to the forecasters’ 2010
growth projection and a slight downside risk to the 2011 forecast. The
main upside risk is the possibility of a better-than-expected external
economic environment, with stronger-than-expected stimulus coming from
the emerging markets.
The main downside risk, expected to be more prominent next year, is
the dampening impact of deficit-cutting measures implemented by many
Eurozone countries.
But that impact is expected to be fairly short-lived. Accordingly,
growth is expected to rise in subsequent years, reaching 1.8% in 2014.
That longer-term forecast is unchanged from the first quarter survey.
Shorter term, leading indicators suggest the Eurozone recovery will
gain some traction in coming months. The PMI polls in particular point
to solid growth at the start of 2Q, with the manufacturing index at a
46-month high (57.6) and services activity growing at the fastest pace
in 18 months (55.6).
In addition, a weaker euro should allow the EMU economies to export
more to the dynamic emerging markets.
However, a big stumbling block is the sovereign debt crisis, which
will intensify the already inevitable tightening of fiscal policy around
the Eurozone. Austerity measures in the high-deficit peripheral
countries, including Greece, Portugal, Spain and Ireland, will weigh on
domestic demand, adding to the drag from sluggish labor markets.
But it’s not just the peripherals. It is also true in France, where
Prime Minister Francois Fillon recently announced a three-year freeze on
public spending starting in 2011. It’s even true in Germany, which is
constitutionally required to balance its budget by 2016.
On the price front, the forecasters revised their consumer
inflation forecast for 2010 up slightly to 1.4% from the previous
projection of 1.3%, reflecting the upward pressure from higher commodity
prices, primarily oil and food. For 2011, HICP is seen rising slightly
to 1.5%, unchanged from the last forecast.
On balance, forecasters said the risks to their inflation forecasts
were on the downside, due to sluggish capacity utilization and weak wage
growth.
The average 2010 HICP forecast is above the ECB staff’s midpoint
projection of +1.2%. The 2011 average matches the ECB staff midpoint
exactly. The long-term inflation outlook, which extends to 2014, is
unchanged at 1.9%.
In April, Eurozone HICP rose 1.5%, the sharpest rise since December
2008, according to preliminary estimates from Eurostat.
At his monthly press conference last Thursday, ECB President
Jean-Claude Trichet noted the unexpected jump but ascribed it mostly to
energy prices and said that while “global inflationary pressures may
increase, driven mainly by price developments in commodity markets and
in fast-growing economic regions of the world…euro area domestic price
pressures are still expected to remain contained.”
While inflation risks in the short term are now pointing “somewhat
towards the upside,” they are still considered to be “broadly balanced”
over the medium term, Trichet said.
New inflation impulses are starting to show up in the sentiment
indicators. Eurozone manufacturers, in response to sharply rising raw
materials costs, hiked their selling prices for the first time in a
year-and-a-half, according to the April purchasing managers’ index.
In the months ahead, a substantially weaker euro could add to the
inflationary pressure created by rising commodity prices.
Service companies are still not passing along their higher input
costs, according to the April PMI, but the decline in their average
output prices was the smallest in eighteen months.
The ECB forecasters’ survey showed that unemployment expectations
were revised down 0.2 percentage point for 2010 and 2011 to 10.3%. The
long-term forecast for 2014 shows unemployment easing to 8.5%, down
slightly from the previous forecast of 8.6%.
Respondents found the balance of risks to unemployment expectations
to be on the upside for 2010, 2011 and the longer term, the ECB said.
–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com
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