Eurozone economy faces stronger headwinds

Updated: 2008-03-27 07:00

BRUSSELS - The eurozone economy is facing stronger headwinds from financial turmoil, a US slowdown and surging oil prices, the European Commission said on Wednesday, while maintaining its previous forecast.

A giant Euro symbol, the currency of the EU, standing in front of Frankfurt's Eurotower, which houses the European Central Bank (ECB). The ECB has said that the eurozone payments current account had an estimated deficit of 10.6 billion euros (16.7 billion dollars) in January. [Agencies] 

"The euro-area economy continues to face strong headwinds, including persistent uncertainties about the duration and the ultimate cost of the financial turmoil, a weakening US economy and surging commodity prices," said EU Economic and Monetary Commissioner Joaquin Almunia.

"In spite of its sound economic fundamentals the euro area is starting to feel the pinch," he added.

Figures showed eurozone economic growth decelerated from 2.6 percent year-on-year in the third quarter of 2007 to 2.2 percent in the fourth quarter, which owed much to a weakening of private consumption on the back of surging consumer prices.

According to the Commission's interim forecast of February, economic growth in the euro zone was expected to slow down to 1.8 percent for 2008.

The most recent hard and soft data were consistent with the previous forecast, the Commission said in its latest quarterly report on the eurozone economy.

Pushed by surging oil and food prices, inflation in the 15- nation bloc sharing the same currency was running at 3.3 percent in February, up from 1.7 percent in the summer of last year. It was the highest level since the introduction of the euro in 1999.

The latest report looked at why growth and inflation have become more stable in industrialized countries in recent decades, a phenomenon economists refer to as the "Great Moderation."

It showed that the economies of the eurozone member states have reacted somewhat differently to the increase in energy and food prices since summer 2007, as a result for example of differences in the weight of food and energy in the national inflation calculation, the degree of competition in retail markets and the position in the economic cycle.

"This 'Great Moderation' is not just due to luck in the form of milder shocks, but also improvements in economic policies, in particular better monetary policy and, to a lesser extent, more powerful automatic fiscal stabilizers," the Commission said.

However, the Commission said continued strong growth in investment supported by high capacity utilization and the high profitability of the non-financial corporate sector is encouraging.

Confidence indicators in the manufacturing sector have generally held up relatively well in recent months and the latest reading of industrial production was stronger than expected.

With the U.S. economy on the verge of a recession, the eurozone economy has to contend with strengthening external headwinds but the euro zone is showing resilience helped by strong growth in emerging markets, the Commission said.

The latest report also looked at recent labor market reforms in the eurozone. The reforms have mainly aimed at increasing labor utilization, especially in groups with low participation rates, such as the low-skilled, women and older workers.

Evidence showed that reforms have paid off, raising employment rates and enabling employment to respond more effectively to cyclical shocks, according to the report.

Top World News  
Today's Top News  
Most Commented/Read Stories in 48 Hours