| Summary |
Following the turnaround in the second half of 2003, economic activity in the euro area and the EU gathered speed this year. Supported by the continued buoyancy of global growth and trade, the growth rates are projected to reach 2.1% in the euro area and 2.5% in the EU this year. This is followed by a deceleration of the order of 0.1 to 0.2 percentage points in both regions in 2005, as the sharp rise in oil prices takes its toll, and a subsequent rebound in 2006 as the latter effect tapers off. Apart from the external impulse from global demand, the main factors behind the outlook include accommodative macroeconomic policies, low inflation, supportive financial conditions, widening profit margins, and progress in structural reforms. The consolidation of the recovery over the forecast horizon is underpinned by an acceleration of investment expenditure and a more gradual pick-up in private consumption. As the lagged effects of the protracted downturn dissipate, the performance of the labour market is expected to respond to the momentum of economic activity. Employment growth in the euro area, at 0.5% in 2004, is expected to accelerate to 0.9% in 2005 and 2006. For the EU as a whole, the pick-up profile is similar, although the rise in employment is projected to be slightly lower. The global recovery has put upward pressure on both fuel and non-fuel commodity prices. In view of the sharp rise in oil prices since the first quarter of this year, the assumed profile for oil prices has been revised upwards compared to the Spring forecasts. From an average of USD 40.6 per barrel (Brent crude) in the third quarter of this year, the price of oil is assumed to rise to USD 50 in the fourth quarter, before declining gradually to USD 42.5 in the last quarter of next year, yielding an average of USD 45.1 per barrel for 2005. Some easing is foreseen during the course of 2006, leading to an average of USD 40.1 per barrel. After a projected rise of 38% this year, this profile implies a further increase of 15% next year, followed by a decline of 11% in 2006. Although the oil price hike is less in real terms than during previous shocks and most industrialised oil-importing economies have reduced their dependence on oil, this year’s sharp rise has already dented world growth for 2004. The persistence of higher oil prices and their increased volatility have adverse implications for the growth outlook over the forecast horizon. Global equity prices have levelled off during the course of this year. Although long-term government bond yields have risen modestly with the measured tightening of monetary policy in some countries, they are still low by historical standards in both nominal and real terms. Corporate bond spreads have also remained narrow. Overall, these developments suggest that financing conditions in the global economy continue to be supportive of world economic activity. |