Eurozone growth rate will depend on oil price levels

BRUSSELS – Expensive oil could slow eurozone economic growth to 1.2 percent this year despite signs of recovery in the second half, the European Commission said in a report yesterday, noting more risks to growth further ahead. The slowdown would be mainly a result of weak consumer confidence in the 12 countries using the euro, as surging energy bills eat into households’ disposable incomes and compound uncertainty stemming from persistently high unemployment. Klaus Regling, head of the Commission’s economic services, told a news conference the new forecast, down from 1.6 percent estimated in April, was based on mid-points of ranges forecast for the third and fourth quarter. The final 2005 forecast would be released on November 17. «It is very likely that what we will present in a month will be close to this but not necessarily of course exactly the 1.2 percent that the mechanical exercise (gives),» Regling said. The new Commission estimate was backed by a forecast from the Euroframe network of 10 leading European forecasting institutes which cut its 2005 eurozone growth estimate to 1.2 percent and also saw threats to growth from high oil prices in the future. «Despite the projection of a gradual return to potential growth in the second half of the year, the outlook is subject mainly to downside risks linked to the international environment and domestic demand,» the Commission’s quarterly report said. The Commission noted that business confidence and industrial production have been on the rise in recent months, helped by low interest rates and demand for eurozone exports from other, faster-growing parts of the world. «There are good reasons to be optimistic about the prospects for an acceleration in economic activity in the second half of the year,» the Commission report said. But consumer confidence has remained subdued as oil prices in euros have surged more than 70 percent since the start of the year and both the Commission and Euroframe expect they will remain above $60 per barrel in 2006. «With real prices roughly triple their average value in the 1990s, this will inevitably impact on inflation and demand in the euro area,» Euroframe said in its report. The fragility of the economic recovery in the eurozone was underlined yesterday by a bigger-than-expected 3.7 percent fall in August manufacturing orders in its biggest economy, Germany, which followed three months of strong growth. But the German Economic Ministry said it saw the decline as only a small correction and prospects for a pickup in manufacturing growth remained favorable. Eurozone inflation jumped to 2.5 percent in September from 2.2 percent in August and 2 percent in May, Eurostat estimates showed last week and Regling said the rise was entirely due to oil prices. He did not rule out more price increases. «I cannot give you at the moment a forecast… but one cannot exclude that prices may go even higher,» he said. The Commission said oil would keep price growth above 2 percent in the coming months, but noted that there were no underlying inflationary pressures building up. Euroframe, which expects the ECB to raise rates only at the end of 2006, forecast average inflation this year at 2.2 percent, falling to 2 percent in 2006. The Commission also warned that a permanent increase in oil prices to around $65 per barrel would boost inflation by 0.3 percentage points during the two years following the oil price rise and reduce economic growth rates further. Among other risks to growth, the report mentioned fully priced assets in the eurozone, and their potential sharp drop if markets were to abruptly change their views on growth and inflation prospects, leading to balance sheet problems among households and corporates alike. The report also warned about a potential sharp depreciation of the dollar against the euro as a result of the large current account deficit in the United States.