European economy faces testing new year

28th December 2007, Comments 0 comments

Europe is entering the new year amid economic uncertainty triggered by the global credit crunch and forecasts of slowing growth.

28 December 2007 

Berlin (dpa) - Europe is entering the new year amid economic uncertainty triggered by the global credit crunch and forecasts of slowing growth.

   While economists lower eurozone growth forecasts, banks have warned it will take time for the scale of the fallout from the US mortgage market crisis and resulting credit squeeze to become clear.

   The real risk for the 13-member currency bloc is stagnation - caused by surging oil and food prices pushing up inflation as a soaring euro, slowing global growth and interest rate hikes threaten to undercut economic expansion.

   "The sentiment indicators have fallen considerably in the past months," said Commerzbank chief economist Joerg Kraemer, who expects lower interest rates next year.

   After emerging last year from a protracted period of stagnation, growth in the eurozone could slip back a gear from about 2.6 per cent this year to closer to 2 per cent in 2008, economists expect.      

   Likewise, growth in Europe's biggest economy, Germany, is expected to drop to 2 per cent next year from about 2.6 per cent in 2007 after expanding 2.9 per cent in 2006.

   Also pointing to more brittle economic times are key forward- looking indicators which have chartered a decline in both business and consumer confidence across the eurozone.

   At the same time, data shows inflation picking up more than forecast following the jump in food prices and the recent record run of oil prices on the back of fresh tensions in the Middle East.

   Having jumped more than forecast in September to 2.6 per cent, economists have now been talking about eurozone inflation accelerating to 3 per cent in the months ahead.     

Overhanging the inflation outlook have been signs that wage-cost pressure could emerge amid evidence of the jobs market tightening and labour shortages hitting key economic sectors.

   Unemployment in the eurozone edged down to 7.3 per cent in September from 7.4 per cent in August, data from the European Commission's statistics office showed.  

   At the same time, after a series of monthly falls in unemployment, the labour market in Germany is now at its strongest point since the nation's unification 17 years ago.

   But accelerating inflation and slowing economic growth are also adding to the pressure on the European Central Bank (ECB) after it shelved a planned rate hike in September following the market turmoil prompted by the surge in defaults in risky US mortgages.

The Frankfurt-based ECB is facing a testing time as it attempts to balance concerns about slowing economic growth and the global credit crunch while also safeguarding its anti-inflation credentials in the face of the sudden sharp upward lurch in consumer prices.

Economists expect the ECB's rate-setting council to sit tight until well into the new year before making its next monetary move while it waits for data of the impact on economic growth of the credit squeeze and the upheaval in the US housing market.   

   What is more, the euro's record high above 1.48 dollars in recent weeks means the ECB has been able to buy time on monetary policy and keep its benchmark refinancing rate on hold at 4 per cent after hiking borrowing costs by 200 points from December 2005 to June 2007.   

   In a sense, however, the eurozone risks turning into reality the concerns expressed by many economists in recent months: that a rising euro could hit exports just as growth in the global economy is cooling down and inflation fears are dampening consumer demand.

   With the euro at an all-time high, the European Commission's closely watched economic sentiment survey has already pointed to concerns among exporters about the impact of the common currency on their business.

   The commission's October survey showed export expectations among eurozone manufacturers down for the first time in nearly three years.

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