United Kingdom Finance Minister Gordon Brown’s stewardship of the British economy last week won glowing tributes from the European Commission, which forecast growth of just less than 3% this year, and next, continuing low unemployment and public finances under firm control.
The commission’s upbeat assessment of the UK’s ruling Labour Party’s performance came in a week wwhen Prime Minister Tony Blair called a May 5 general election that will be dominated by Conservative opposition charges that the government’s spending policies are out of control and will inevitably lead to higher taxes.
As it praised the British economy, the commission slashed its forecasts for eurozone growth this year and warned that it could be forced to cut them even further because of rising oil prices, the strength of the euro and poor consumer confidence.
The Brussels economic experts confirmed Brown’s forecast of ”firm” economic growth this year and next by pointing to 2,8% in both years, just shy of Brown’s own estimates. They said exports should offset a slight fall in consumer spending growth to 2,25%.
But Labour will seize on their optimistic analysis of Britain’s public finances, with the budget deficit estimated to be 3% this year and 2,75% in 2006 and national debt, though rising slightly, held at ”close to” 40% of gross domestic product.
The commission said higher government spending this year would be offset by growing tax revenues fuelled by strong growth in the economy as a whole — effectively undermining the opposition’s main charge against Brown and Blair.
”The moderate evolution of wage growth combined with good productivity growth suggests that unemployment should remain low and stable at around its current level … throughout the [next two years],” the commission said. Unemployment in Britain is at around 5%.
But, in its second quarter forecast the commission said growth in the 12-member eurozone would be just 1,6% compared with its third quarter estimate last year of 2%, confirming the growing pessimism among economists about the strength of mainland Europe’s recovery.
Beset by a record 5,2-million jobless and weak consumer spending, Germany, the eurozone’s biggest economy, is forecast to grow by just 0,8% and to be on course for breaching the 3% budget deficit ceiling for the fourth year in a row.
The commission’s forecast is based on data released before the recent gloomy set of indicators pointed to a further softening of growth prospects, with an unexpected sharp fall in both consumer and business confidence across the eurozone.
Joaquin Almunia, the Economic and Monetary Affairs Commissioner, admitted that the risks that could worsen the forecast growth were stronger than those that could help it.
Nevertheless, he insisted that recovery would gain momentum through stronger domestic demand and rising employment.
His forecasts are based on oil prices averaging $50,90 this year before dropping marginally in 2006 to $48 a barrel — compared with the recent $58 — while the euro is expected to remain at about $1,32.
”If the dollar goes down we could see some negative impact in the short term for our growth rates,” he said.
But the commission expects a shift from export-led growth to one prompted by rising domestic spending and higher investment, with the eurozone back up to its potential of 2% growth by the end of this year.
Economic growth in the European Union as a whole is forecast to be only 2% in 2005 rising to only 2,3% in 2006, largely because of outperforming economies outside the euro such as Britain and Sweden.
Its forecast will increase pressure on the European Central Bank to keep interests rates at 2% when it meets this week despite warnings that the recent loosening of the stability and growth pact will force it to react with higher borrowing costs. Observers expect the bank to raise rates to 2,75% from the second quarter.
In Germany the government admitted it could be forced to take extra measures to curtail its budget deficit but stuck to its forecast of 1,6% growth this year.
French ministers insisted they would meet both the 3% deficit and 2,5% growth targets this year despite Brussels forecasting that growth would be just 2%. — Â