21 December 2007

EBF Economic Outlook

The EBF published its year end economic outlook stating that the euro area will not be immune to global slowdown. The senior economists of the European banking sector emphasise that pressure will come from a number of fronts, the most influential of which is the cyclical slowdown in the US.

The consequences on the economy of the financial turmoil are starting to show and the ensuing re-evaluation of the euro against the dollar makes euro area goods less competitive. Notwithstanding these areas of concern, EMAC members estimate that the euro area should grow close to the estimated potential of 2% in 2008.

It must be noted, according to the economists, that although the European economy has reaped the benefits of globalisation, it has also been more rapidly “contaminated” by the effects of the US sub-prime crisis because of the inter-connection of markets. Confidence across markets globally has indeed been affected.

Fortunately, the economic revival of the euro area over the last 12 months has helped the private sector reinforce its financial position, which should provide a tangible source of economic strength for the coming months. EMAC members stress that the EU is in a better position to face such turmoil now than it would have been a year ago. They also welcome the European Central Bank’s reaction to the market turmoil. Assuming oil prices go down, inflation risks should be minor for the coming year, with core inflation rates estimated at 2% and headline (HCIP) at 2.2%.

Generally speaking, EBF’s EMAC members still anticipate a strong euro for 2008. On average, they foresee a euro at 1.41 to the dollar by the end of the coming year, with individual forecasts ranging from 1.33 to 1.60.

© Graham Bishop