[Jesse Antarctica]

Euro-area cyclical upswing slowed in the third quarter of 2004

GDP growth in the third quarter was marginally lower than expected, according to the European Commission’s Quarterly Report on the Euro Area, released today. Nevertheless, while recent data suggest that there remain risks to the short-term growth outlook, they should be put into proper perspective. The slowdown comes against the background of more favourable than expected economic developments in the first half of the year. In addition, economic activity did not decelerate everywhere in the euro area; it even strengthened in several countries. Finally, changes in third quarter growth were dominated by large swings in the most volatile components of demand and should therefore be interpreted with caution.

In the report’s editorial, Joaquín Almunia, EU Commissioner for Economic and Monetary Affairs writes, “While the easing of growth momentum in the second half of the year suggests that downside risks have not abated, the Commission’s Autumn Economic Forecasts’ basic scenario of growth in the euro area of about 2% this year and next still stands.”

Economic growth in the third quarter (Q3) of 2004 was marginally lower than expected, according to the European Commission’s Quarterly Report on the Euro Area, released today. GDP growth in Q3 was 0.3 % compared with the previous quarter when the euro area economy grew 0.5 %.

Leading indicators point to muted growth in the last quarter of 2004 with business confidence weakening. However, this is counterbalanced by positive news on the investment side and the fact that some indicators have behaved better than expected in September and/or October (retail sales and new orders in the euro area, industrial production in Germany and France).

Examining recent exchange rate developments, the report finds that the appreciation of the euro against the dollar is essentially the result of the dollar’s weakness and that its recent evolution against other currencies has been much less pronounced. The real effective exchange rate, an important measure of competitiveness calculated by taking into account both exchange rate and cost developments, is only slightly above its 1995-2004 average. Thus, while the euro is strong, its level is not yet substantially out of line with fundamentals. Moreover, the euro appreciation has had the benefit of reducing the impact of rising (dollar-denominated) oil prices.

In a special section about recent trends in foreign direct investment (FDI), the report finds that EMU has played a positive role in increasing FDI flows between euro-area countries while investment outside the area does not appear to have been at the expense of domestic investment. Flows into the euro area can be beneficial, bringing more investment, greater efficiency and technological spillovers into the wider economy, while flows from the euro area to third countries give companies access to foreign markets and provide consumers with cheaper goods.

However, it is important to ensure that product market competition is strong enough to ensure that cost savings to firms investing in FDI overseas are passed on to consumers, and that labour market policies help laid-off workers acquire the skills they need to find new jobs.

[WoolyGoat]