Prospects for the European Union

Extract

In the first half of this year, the Euro Area economy continued to lag behind much of the rest of the world. After stagnating in the first quarter, GDP contracted by 0.1 per cent in the second quarter following an average quarterly expansion of 0.3 per cent in 2002. The appreciation of the euro is largely to blame for this development, taking a toll on exports. The weak outcome for the first half of the year, coupled with the appreciation in the nominal effective exchange rate by about 6.9 per cent over the same period and weak prospects for private investment, dampens the outlook for the year as a whole. Industrial production declined by 0.4 per cent in August, supporting our assessment that a Euro Area recovery is not yet underway. In light of the most recent evidence, we have revised our estimate for Euro Area growth in 2003 downward to just below ½ per cent. However, we continue to expect a more pronounced pick-up in growth to around 1¾ per cent in 2004, as domestic and external demand both strengthen. Output growth in the Euro Area is projected to return towards trend levels of about 2½-2¾ per cent per annum in 2005. The output gap in the Euro Area is expected to widen further in the second half of 2003, with the economy returning to capacity output in 2006.