White knight

Euro zone stuck in growth slump


By : Allister Heath October 16, 2005



ECONOMIC growth in the euro zone is set to suffer a dramatic slowdown this year, dashing hopes of a sustainable recovery, according to a poll of leading investment banks and research houses published this weekend.

The weak growth is fuelling fears of higher than expected deficits across the euro zone, with several leading institutions slamming European governments for failing to rein in spending and resorting to creative accounting to keep their official shortfalls under control.

Theodor Schonebeck, economist at Deutsche Bank, said: “What is worrying about the fiscal plans for 2006 is that many of them appear to be based on overly optimistic growth assumptions and that the popularity of one-off measures has increased again. This means that a thorough reduction of the deficits will be postponed again – and this will weaken the member states’ ability to absorb the additional fiscal burdens from population ageing.”

The euro zone economy is expected to grow by only 1.3% this year, down from 1.8% last year, the poll from MJ Economics reveals. The 1.3% rate would only equal the average growth rate recorded over the previous four years, the study shows, suggesting the region’s economy is now stuck in a low-growth rut.

Some are even more pessimistic, with the Economist Intelligence Unit expecting a mere 1% growth, Lloyds TSB and HSBC 1.1% and Bank of America, BNP Paribas, Grupo Santander, JP Morgan Chase, Lehman Brothers, Morgan Stanley, Nomura International and Oxford Economic Forecasting all predicting 1.2% growth this year.

In a further blow, the euro zone economy is no longer expected to make a significant recovery in 2006, with growth forecasts now a mere 1.6%, in contrast with earlier hopes that economic activity would pick up, according to the poll from MJ Economics.

Longer-term forecasts also confirm the markets’ dramatic decline in confidence towards the euro zone, suggesting that the regional economy is unlikely to achieve growth of more than 2% over the next five years.

Recent statements from the European Central Bank suggest it has become more concerned over upward risks to inflation. The chances of a rise have increased since last month. Thomas Mayer, Deutsche Bank economist, said: “Conditional on no change in the recent trend in economic and monetary data, we expect the ECB to hike rates within the next few months, and we would put a probability of slightly more than 50% on a move already in December.”

The weak growth will help push the overall euro zone budget over the 3% of GDP limit for the first time since the launch of the euro, Morgan Stanley said last week. It is forecasting a 3.1% of GDP deficit this year, excluding one-off receipts.

According to its budget draft for 2006, the French government claims to be aiming for a deficit of exactly 3% of GDP this year and 2.9% in 2006, against 3.6% in 2004. However, the recent figures have been flattered by one-off transfer payments from Electricité de France (EdF) equivalent to about 0.5 points of GDP. EdF paid this sum in return for the government’s taking on pension commitments and it is therefore extremely unlikely that the government will meet its target for 2006.

Deutsche Bank is also predicting that the Italian budget deficit will remain at 4.3% of GDP in 2006. Other countries with huge budget deficits include Germany, Greece and Portugal.

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