�After a disappointing first half, the euro area and the EU are in a good position to take advantage of a global outlook that remains bright. The return of economic confidence and the steady decline in unemployment are expected to encourage consumption and to boost investment, which benefits from favourable financial conditions and good corporate profits. The 0.6% growth figure for the third quarter further confirms this trend�, said Joaqu�n Almunia, the Economic and Monetary Affairs Commissioner.
Economic growth is expected at 1.5% in the EU in 2005 after 2.4% last year before increasing again to 2.1% in 2006 and 2.4% in 2007. The 2005-2007 forecasts for the euro area are 1.3%, 1.9% and 2.1%.
Investment accelerates
This is explained by the rebound in economic confidence in the second half of 2005 ending a soft patch since the fourth quarter of 2004 caused by soaring oil prices, a deceleration of global growth and weak domestic demand in Europe. Total investment growth is now expected to increase to above 3% in 2006 and 2007. The upturn in investment is, in particular, explained by the return of business confidence, the continued improvement in corporate balance sheets and an increasing need for replacement investment. .
The main factors behind the overall outlook in general include an accommodative macroeconomic policy mix, benign financial conditions, wider profit margins, a weaker nominal effective exchange rate and a still robust global environment.
Unemployment is falling steadily
After increasing in recent years to 9.0% in the EU and 8.9% in the euro area , the unemployment rate is set to decrease by almost one point to 8.1% in both areas by 2007. In all, the EU is expected to create six million new jobs between 2005 and 2007, of which 4.5 million in the euro area including 1.4 million in 2005. The improved labour market conditions are expected to strengthen consumer confidence, thus supporting the gradual recovery of private consumption.
Reflecting the increase in oil prices, inflation is seen at 2.3% on average this year in both the EU and the euro area before easing to 2.2% in 2006 (both areas). More importantly, core inflation (excluding energy and unprocessed food prices) remains low and shows no second-round effects from rising oil prices so far.
The slowdown in economic activity at the beginning of this year, however, has taken its toll on public finances in 2005. The general government deficit as a share of GDP is estimated to rise by two-tenths of a percentage point to 2.9% in the euro area and by one-tenth to 2.7% in the EU as a whole, before improving only marginally in 2006 and 2007.There are still large differences across countries, with 12 Member states running excessive deficits[1] (or expected to be) in 2005 of which five in the euro area. At the other side of the spectrum six countries are in balance or surplus.
Global outlook remains bright, but risks persist
The revival of growth in the EU is supported by a global outlook that remains vibrant. World growth is seen at 4.3% this year and next before edging slightly lower in 2007. It was 5% in 2004 � the fastest pace since the early seventies. Whilst easing, growth in Asia will stay around 7-7.2% over the forecast horizon. This excludes Japan (2.5% this year and 2.2% in 2006).
The same can be said about world trade, which has accelerated again after a soft start and is seen growing at around 7% during the forecast period.
But the external side also continues to present risks to Europe�s economic outlook while on the domestic side the risks appear more balanced.
A disorderly correction of global imbalances and/or an adjustment of US consumer behaviour are one of the main downside risks while further oil price increases cannot be ruled out. On the positive side, oil-exporting countries might spend a larger share of their additional oil income, which would benefit EU exports.
Domestically, and on the up side, private consumption could increase more markedly, releasing pent-up demand, as the labour market situation improves and uncertainty linked to future income streams (such as the sustainability of social security and pension systems) declines. However, high oil prices, continued weak consumer confidence and low growth expectations could also weaken the recovery.
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