European economic growth is likely to slow going into 2007, as weaker exports to the United States and a softening of consumer demand and business investment take affect amid higher interest rates, international ratings agency Standard & Poor’s (S&P) says in its latest economic forecast for the region.
The article, titled, European Economic Forecast: A Strong Year So Far, But
A Slowdown On The Way, is part of a special S&P report in CreditWeek, due for
release on August 30.
“In the Eurozone, the way that higher interest rates affect demand in each country will partly depend on consumers’ room for manoeuvre in terms of savings,” said Jean-Michel Six, S&P’s chief economist for Europe.
“Whereas savings rates are likely to go up in Germany and The Netherlands, thereby amplifying the slowdown, they could edge down in France, Italy, and Spain, mitigating the negative effects of higher interest rates,” he added.
Externally, foreign demand for European products is likely to slow in 2007, and the euro exchange rate could well strengthen against the US dollar and the related Asian currencies, as markets focus again on the US current account deficits once the Federal Reserve reaches an end to its monetary tightening cycle.
In this context, Eurozone export growth should decline to 4,5% in 2007 from 6,5% in 2006, thereby slowing GDP growth, the report stated.
In the UK, although consumer demand has slowed somewhat, households have not yet been able to stabilise their ratio of debt to disposable income, which currently stands at a record high of 146%.
“In this buoyant environment, retail price inflation has been so far remarkably subdued. At 2,5%, it is above the Bank of England’s official 2% target but has not shown any sign of acceleration. This is partly because average earnings growth has remained moderate, at 4,1% in the past 12 months to May 2006, showing that the economy has not entered a price-wage inflationary spiral. In this context, we expect the Bank of England to keep its benchmark interest rate at its current level of 4,75% at least until the end of 2006,” the report said.
“By then, economic growth should have stabilised around trend as weaker demand from the Eurozone and the US, the UK’s two largest trade partners, dampens export growth,” said Six.
“Against this backdrop, we expect the UK economy to grow by an average of 2,5% in real terms in 2006 and 2007, before accelerating slightly to 2,8% in 2008.”
Finally, in Central Europe, Hungary is likely to see real GDP growth decelerate to about 2,5% in 2007 from 4.2% in 2006, as the government undertakes drastic fiscal retrenchment to curb a burgeoning budget deficit.
By contrast, growth should accelerate somewhat in Poland in 2007, as private consumption will benefit from the indexation of pensions, and the lowering of personal income tax rates. In the Czech Republic, GDP growth will experience a mild deceleration in the next couple of years as domestic demand progressively replaces net exports as the main engine. – I-Net Bridge