Commission stands firm on economic forecasts

Date: 16/04/1998

By Tim Jones

EUROPEAN Commission forecasters are sticking to their relatively optimistic outlook for Asian economies despite the latest evidence of a serious downturn in Japan.

Anxiety is growing among members of the Group of Seven leading industrialised countries about the impact on the US and European economies of a recession in Japan.

Last week, the Organisation for Economic Cooperation and Development (OECD) forecast that Japanese gross domestic product would shrink by 0.3% this year and only grow by a sclerotic 1.3% in 1999. In 1997, GDP grew by only 0.9% and, towards the end of the year, the economy began to nose-dive.

However, Commission forecasts published just a week earlier to coincide with the report assessing member states' readiness to join the euro-zone are far more optimistic. They assume growth in Japan of 0.4% this year and 1.5% in 1999, and a yen-per-ecu exchange rate of 139.9, compared with a current rate of more than 144.

A Commission official insisted that these were "prudent assumptions" which did not have to be changed.

The Japanese outlook has been undermined by the recent financial turmoil in South East Asia, which has weakened demand in the region for exported goods and exposed some of Tokyo's already shaky financial institutions to a sudden surge in bad and doubtful loans.

Other G7 members - the US, Germany, the UK, France, Italy and Canada - have called on the Japanese government to boost the country's economy by cutting taxes and increasing public spending. Interest rates are already so low that they cannot be cut again and G7 members would be opposed to any measures which caused the yen to fall further.

In response to these demands, Japanese Prime Minister Ryutaro Hashimoto last week announced tax cuts for 1998-99 totalling close to 30 billion ecu, to be added to the previously announced 110-billion-ecu fiscal stimulus package.

The position of European exporters has deteriorated because the collapse of several South East Asian currencies and the recent fall in the value of the yen have further shifted the balance in the Asians' favour.

Some analysts fear that this, together with the possibility that these devaluations will cause a massive fall in the price of imported consumer goods from Asia, could undermine European growth and monetary stability in the run-up to the euro.

However, the Commission remains convinced that GDP will grow in the 11-member single currency area by 3.0% this year and 3.2% in 1999.

Officials said that this belief had been reinforced by the latest survey of EU business sentiment, which showed increasing confidence regarding orders and costs throughout the Union.