The International Monetary Fund has just published its latest assessment of Eurozone's economic prospects. It's mixed, but not as bleak as some may have expected. The staff report, at the front of the Country Report, sums it up this way:
The low-flying recovery has hit a rough patch. With domestic demand lacking vigor in the
midst of a difficult structural/cyclical transition, the ongoing recovery has run into significant headwinds, notably high oil prices and (until recently) a sustained appreciation of the exchange rate.
IMF economists estimate oil price hikes and the euro’s appreciation each detracted about ½ percentage point from real GDP growth in 2004, and will also weigh on growth this year. Coupled with soft domestic demand, they have cut their Eurozone growth forecasts to 1.3% for this year (from 1.6%), and 1.9% in 2006 (from 2.3%).
While recent data suggests growth could pick up in the second half of this year, the IMF forecast only a "tepid recovery", because "consumption is unusually sluggish".
The elements for a more vigorous, self sustaining recovery have yet to come together, however, with household consumption a key missing link. Reticent consumption growth has moved in line with small gains in disposable income, limited by modest wage earnings and unfavorable price shocks.
Even higher house prices haven't been much help:
Low interest rates have fueled demand for housing, but new home purchases and rising real estate values have not translated strongly into higher consumption expenditures, given relatively few avenues in Europe to tap into home equity.
As for the European Central Bank, IMF staff think they've been right to keep interest rates on hold at 2% so far - "but a need for a rate cut may be materializing."
The monetary policy stance remains appropriate, for now. [but]...a rate cut would be needed if, absent new information on inflation, evidence accumulated that the recovery was fading.
On the reform front, the IMF noted that: "In many quarters, perceptions of and patience with Europe reached new lows during this year’s Article IV consultations". Michael Deppler, Director of the IMF's European Department, was even more blunt at today's press conference:
In the Fund's experience, the main thing that is important about an economic strategy is that it hangs together, that the parts are consistent and people get a clear vision of where they're going and what's going to be happening looking over time. This is simply not the case in Europe today. The signals are left and right and up and down and people are confused.
Deppler said he was encouraged by the German Hartz IV reforms and the French pension reforms, but more was needed - particularly to restore fiscal credibilty by aiming for balanced budgets "in the next few years, essentially by 2010". Other key areas for reform cited by the IMF staff included trade, especially "greater access to its agricultural markets", as well as "reforming entitlement systems, boosting labor utilization, completing the internal market, and integrating national financial systems."
The full IMF Country Report is well worth reading. For those wanting even more, the accompanying 178 page Euro Area Policies: Selected Issues contains in-depth assessments of five issues:
- House Prices And Monetary Policy In The Euro Area
- Product Market Regulation and the Benefits of Wage Moderation
- Declining Money Velocity in the Euro Area
- The Integration of European Financial Markets
- Banks and Markets in Europe and the United States
UPDATE: Brad DeLong gave a Nightly Business Report commentary on European growth on 8 August:
This is not a recession. But it is far from a boom. And it is far below what we would hope to see for a region where, after all, the unemployment rate is still near ten percent.
He makes three main points. First, due to "anemic" domestic demand Europe is heavily dependent on export-led growth. Second, low inflation means the ECB ought to be cutting rates. But third, unlike the Federal Reserve "Europe's central bankers simply do not see boosting employment as an important part of their job".
The first and last points are quite true. However it would be a mistake to assume that rate cuts would do much to boost European growth. Money is already very cheap - real Eurozone cash rates are only about half a per cent. The problems are structural, not cyclical. Regulations, rigidities and offshore competition make investment and job creation less attractive in many parts of Europe than they are in the US.
The global economy sits on the edge - the very edge. The Islamic militants who 5 years ago were in their mosques, on their knees with shoes outside, devoutly and ferverantly worshipping the same God as Abraham and Jesus, have turned turned their fervor to protect, in their eyes, their beliefs, their honor, and their culture. To every action, a reaction, so purported a rather famous and remarkable British scientist, who had some current connectivity with today's circumstances with his difficulties in the South Sea Bubble...The world is at a historical point of global consumer saturation, debt, forward consumption, overcapacity, and lagging wages coming into equilibrium with the new Asian factory worker. Its time to round up the usual Islamic scapegoats. Kindly visit The Economic Fractalist. G Lammert
Posted by: gary lammert | Friday, August 05, 2005 at 01:17 AM