IfW Press Release September 27, 2007

EUROFRAME – European Forecasting Network

Economic Assessment of the Euro Area:
Forecasts and Policy Analysis

The EUROFRAME – European Forecasting Network comprises ten of the most respected economic forecasting and research institutes in Europe, including the Kiel Institute for the World Economy (IfW). On behalf of the European Commission, it produces bi-annual reports on the euro area covering economic forecasts, regular policy monitoring and special policy topics.

Today sees the launch of the network’s report for Autumn 2007. Among the findings contained in the report are the following:

· The economic upturn in the Euro Area lost some momentum in the first half of 2007. Quarterly real GDP growth in the Euro Area slowed to 0.3 per cent in the second quarter of 2007, down from a stronger than expected 0.5 per cent in the first quarter.

· However, there is an impression that actual economic developments in the second quarter could have been somewhat stronger than is implied by recent national account statistics.

· For example, a continued strong expansion of economic activity in the Euro Area is suggested by the strong performance in the labour market. Employment grew by another 0.5 per cent in the second quarter, bringing annual growth to 1.7 per cent. Unemployment continued to decline steadily and fell to 6.9 per cent, down from 7.1 per cent in March and 7.5 per cent in December last of year.

· Looking further ahead, the outlook is obviously clouded by the recent events in financial markets and the uncertainty about their impact on the real economy. It is difficult to assess at this juncture to what extent and for how long financing conditions for firms and household will be negatively affected and what impact the current developments will have on business sentiment and consumer confidence.

· In the context of this major caveat of high uncertainty, we forecast the economic expansion in the Euro Area to remain strong in the second half of 2007 bringing growth for the full year to 2.7 per cent and we expect it to slow moderately in 2008 and 2009 to around 2 ¼ per cent.

· As regards individual countries within the Euro Area, real GDP in Germany is projected to increase by 2.2 percent next year (on a working day adjusted basis; 2.1 percent on an unadjusted basis which is usually referred to in Germany), followed by 2 percent growth in 2009. For France, the corresponding growth projections are 2.3 percent and 2.1 percent. For Italy, we are forecasting real GDP growth of 1.5 percent in 2008 and 1.7 percent in 2009.

· In the general context of uncertainty in international financial markets, we consider the potential recessionary impacts of a banking crisis. Our hope and expectation is that the current crisis is a short-term problem of liquidity in some parts of the banking sector. Our simulations suggest that the effects of such a “blip” on the potential output of the Euro Area would be quite limited. Hence we have not made major changes to our forecast for 2008. However, if a full-blown banking crisis were to develop, then we could see a prolonged period of stagnation, or even a recession. There would be the danger that even if such a crisis were to originate in the US, contagion would see it spread immediately to Europe. It is the task of the Fed, the ECB and the other European central banks to ensure that such a crisis does not happen.

The report looks at the situation on housing markets in the Euro Area and discusses the potential risk of a pronounced slowdown such as is currently experienced in the United States. On the basis of an analysis of fundamental factors it is found that the risk of a sharp correction is currently limited in the major Euro Area countries, perhaps with the exception of Spain.

Contact:

Dr. Klaus-Jürgen Gern
Phone +49 (0) 431-8814-262