Growth targets shift likely

NICOSIA – Recession in the United States would have a moderate impact on the eurozone economy but growth forecasts for the 15 eurozone members will probably be revised slightly lower, Cyprus’s finance minister said yesterday. «The impact of a US recession, which is now more likely and might even be more serious than people had thought, on the eurozone… will be relatively modest,» Finance Minister Michael Sarris told Reuters in an interview. «I would not expect more than 0.10 to 0.20 percent slowdown in the growth rate, I do not think there will be a significant impact on growth.» Sarris said the European Central Bank is likely to trim its GDP growth forecasts when it issues its new projections in March, from a current 1.5 to 2.5 percent. «It (downward GDP growth revision) will be very slight. Of course economic growth rates vary from country to country and that is why it is important to focus also on reforms and economic policies conducive to growth, competitiveness that help increase productivity,» he said. Sarris said the prospect of stagflation – slow growth combined with high inflation – was a bigger danger for the US than the eurozone economy. «I am not too concerned about stagflation, Europe has made more progress in liberalizing its economy and implementing structural reforms than people give it credit for. It has had to come a longer way than the US,» he said. But this does not mean the ECB will hesitate to act if it sees price pressures translating into big wage increases, risking an inflationary spiral – the so-called second-round effects. «They (the ECB) are not so concerned about first-round effects of inflation. But they will be very concerned if they are followed by significant wage increases. If the message they get is that it will be getting out of hand, I think they will move quickly to avoid having to do a major correction later.» «It is always is wiser to try to fix things early on when both the size of the problem and the price you have to pay for correcting it is small,» Sarris said. He said the combination of policies will make sure eurozone inflation moderates and «the price we pay on growth will not be too big.» Asked whether the single currency was overshooting beyond levels justified by fundamentals, Sarris said wide currency fluctuations were not desirable and that currencies should reflect fundamentals. He said the British pound’s weakness was a cyclical phenomenon as it had appreciated a lot versus the US dollar. «I think we will see a correction which will come more from the pressures of the dollar having to return to a more historically sustainable relationship versus the euro,» Sarris said. Cyprus joined the eurozone on January 1 with Malta, after wrestling down high deficits and debt levels. Sarris said the island was on track to return a 0.5 percent budget surplus in 2008, and cut its public debt to 48 percent of GDP at the end of the year from 60 percent in 2007. Authorities, he said, had not decided how to arrange their borrowing requirements in 2008. «They are clearly more modest than they have been before, because if we are running a surplus we are servicing the debt quite comfortably.»