Steep oil prices to hamper euro-zone economic growth

Date: 16/11/00

By Tim Jones

EURO-ZONE economic growth will slow from around 3.5% this year to just over 3% in 2001 as higher oil prices hit households' buying power and push up firms' costs, according to European Commission forecasts to be published next week.

The estimates, together with the latest Economic Outlook report from the Organisation for Economic Cooperation and Development (OECD) due out next Tuesday (21 November), will make the European Central Bank think twice about raising interest rates in the 11-nation currency area to douse 2%-plus annual inflation.

Sources say the forecasts issued by the Commission in the spring for gross domestic product growth - 3.4% this year and 3.1% next - will hardly change when the forecasts are revised next Wednesday (22 November).

Although some private-sector economists anticipate stronger growth rates next year on the back of 3%-plus expansion in Germany, France, Italy and Spain, the Commission will urge caution following a precipitous drop in German manufacturing orders and the weakest index of euro-zone purchasing managers' intentions in 16 months in September.

Fourth-quarter GDP growth is expected to slow to 0.7% compared with the previous three months, and a deceleration compared with 0.9% and 0.8% growth in the first and second quarters of the year.

Given the clouds on the growth horizon, Economics Commissioner Pedro Solbes will step up his warnings to the soon-to-be-12 euro-zone governments that they need to do more than use windfall tax receipts and falling dole bills to bring their finances under control. The zone's aggregate budget deficit will be revised from spring's 0.9% of GDP in 2000 to around balance, but will be forecast to widen again to about 0.8%.

While growth slows down but remains broadly in line with the spring forecasts, the Commission's earlier inflation estimates are way off beam.

The spring forecasts pegged inflation in 2000 and 2001 at 1.8%. This year's figure will be raised to around 2.3% while next year's will decelerate closer to 2% - the ECB's ceiling for annual price rises - as the base for the year-on-year index measurement rises and the Commission expects tighter monetary policy to squeeze demand as well as a stronger euro rate against the US dollar.

The strengthening euro will reflect assumptions about a slowdown in US growth - a trend forecast in the OECD's 'leading indicator' for the American economy, which is at its slowest growth rate since January last year.

Commission economists also assume that the massive capital outflows from the euro area to the US will slow. Nevertheless, they will scale back their 2000-01 forecasts for the euro zone's current account surplus - the gap between money coming into the area for exports and transfers and that going out - from 0.4% and 0.6% of GDP to around 0.2% each.

Euro-zone economic growth will slow from around 3.5% in 2000 to just over 3% in 2001 as higher oil prices hit households' buying power and push up firms' costs, according to European Commission forecasts to be published on 21.11.00.