Slow eurozone growth may be ‘as good as it gets,’ experts fear

LONDON – The eurozone looks set to have recorded another annualized economic growth rate in excess of 2 percent in the second quarter of 2004 but signs of tiredness last month have again provoked nagging doubts about its fitness. Business surveys compiled by research firm NTC for Reuters pointed to a mild slowdown in growth in June – in keeping with signs of cooling from polls in the United States and Japan too. NTC’s composite index – which is gleaned from surveys of some 5,000 manufacturing and service sector firms, and accounts for some 75 percent of private sector activity in the bloc – dipped to 55.6 in June from 56.0. NTC said the surveys show an estimated year-on-year growth rate accelerating to 2.3 percent in the second quarter from 2.2 percent in the first and claim these readings are often closer to final government statistics than early «flash» estimates. But economists said momentum seemed to tail off worryingly as the mid-year point approached. Despite displaying continued growth by staying well above the boom-bust 50 mark, the index slipped in June for the first time since February. Also, the composite does not include the retail sector – which is very subdued in Germany at least – and may mean the NTC readings are slightly overoptimistic. «Our own monthly GDP estimates – which take a whole range of polls and high-frequency indicators – show some tentative signs of rollover,» said Julian Callow, chief European economist at Barclays Capital. Eurostat is not scheduled to release its flash estimates of second-quarter GDP until August 13. Upgrades and revisions Most European economists, including Barclays, believe a reasonably durable economic recovery is underway. Barring a dramatic slowdown of the world economy this year, growth will probably hum around current levels into 2005. Eurostat is widely expected to confirm a Q2 growth rate of 0.5-0.6 percent – roughly equivalent to the surprisingly fast 0.6 percent quarterly rate recorded during the first three months of the year. A series of bearish full-year forecasts from governments, think-tanks and banks are being revised up. The mid-range forecast of more than 30 economists polled by Reuters in April was for a 2.0 year-on-year growth rate in the final quarter of this year and this is now likely to be higher, given the first-quarter data and spate of upgrades. On Friday, the European Commission said its spring forecast of 1.7 percent growth for 2004 appears to have been «somewhat on the low side.» Once bitten… But given the recent economic legacy of regional underperformance and false starts, even the slightest hint of a setback sows seeds of doubt among forecasters. And there are a number of persistent and familiar concerns as the second half of the year gets underway. The first is a hardy perennial. High unemployment – stuck at around 9.0 percent of the bloc’s workforce – and sluggish job creation during the current rebound mean household consumption, in Germany in particular, remains low and leaves the economy leaning heavily on savings and external trade for support. While households are more upbeat in France, Spain and even Italy, Germany still accounts for 30 percent of regional output and the absence of spending there weighs heavily on the bloc. The second potential problem follows from that: If the boom in global trade since the middle of 2003 is cooling before the eurozone has fostered some durable growth in domestic demand, the region could be exposed. «The recovery is not yet self-sustaining and, in the context of a maturing global trade cycle, robust domestic demand will become increasingly necessary,» the Commission’s quarterly report said last week. However, many economists feel the picture remains relatively rosy and more cause for optimism than gloom. Ian Stewart, economist at Merrill Lynch, said the surge in crude oil prices of over 10 percent in May was a likely culprit for the dip in business confidence last month and oil has retreated significantly since then. He also said that while the headline indices of the NTC surveys dipped, the employment components continued to edge higher and this was encouraging for hopes the upswing would soon start to create jobs. Also, the economy may already be close to its potential. «You have to remember that given demographics and other factors, a eurozone growing at or above 2 percent is probably growing around trend levels,» said Stewart. «It may be the case that this is simply as good as it gets.»

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