European growth and jobs in 2008

20 December 2007

Review of economic trends in 2007

Fabian Zuleeg, EPC Senior Policy Analyst, summarised world economic trends for 2007, saying the weak US dollar and the continuing US trade deficit had implications for EU businesses. Its banking crisis is affecting banking markets, particularly in the UK and Germany, and there is speculation that the US might move into recession.

Commodity prices have increased faster than the stock market and these high prices are affecting annual consumer inflation, which, at 3.1%, is above the European Central Bank’s target.

The two most striking issues in the global economy are the rise of China, India, the Middle East and Russia as major economic players, and the threat of climate change.

The EU economy recovered in 2007, boosted by German economic growth. Europe’s labour market has recovered, unemployment has dropped, productivity growth is stronger than the US and the EU is in a strong trading position - again particularly thanks to German exports. However, this optimism is tempered by the slowdown in property markets, especially in Ireland and the UK.

Economic policy issues debated in 2007 included the governance of the euro and the current French leadership’s emphasis on protecting Europe’s citizens, which could morph into protectionism. Overall, there is significant doubt about the long-term future of global financial markets and Europe’s economic future, said Mr Zuleeg.

The OECD’s perspective on 2008

Jørgen Elmeskov, Acting Chief Economist at the Organisation for Economic Co-operation and Development (OECD), said that given the financial turmoil, the downturn in housing markets and the increase in crude oil prices, the OECD has revised its predictions of growth in the euro zone in 2008 downwards.  

However, despite the financial turmoil, forecasters believe that current problems will gradually work themselves out, as world trade remains buoyant, particularly while non-OECD economies - which are now less dependent on the OECD countries - continue to grow. Business confidence is still above normal in the euro area even as the “head winds hit us”, said Mr Elmeskov.

On the positive side, there has been strong job creation, and a fall in unemployment in the euro area. This, coupled with resilience in house prices, will mean the situation remains “moderate”, and although growth rates are below expected trends, the export market growth will remain relatively brisk and oil-producing countries will reorient their demands towards the euro area.

Mr Elmeskov noted a number of other future trends: euro-zone exports will no longer pull GDP growth, and the slowdown in business investment will be “cushioned”.

In addition, the recent “nasty inflation” in consumer prices should be reversed by the end of 2009: with an appreciating exchange rate, tighter credit conditions and the weakness in the construction industry, inflation will drop to the European Central Bank’s (ECB) 2% target.

While the fiscal position has improved, the “buoyant tax position is lower than before” said Mr Elmeskov, and warned that countries will need to consolidate fiscally. Overall, the outcome looks “rather benign”, but this rests on the headwinds not increasing and on continued resilience.

European Commission’s forecast for 2008

Marco Buti, Deputy Director-General, Directorate-General for Economic and Financial Affairs, European Commission, said forecasters are cautiously predicting that despite blips, there will be gradual but sustained GDP and employment growth.

GDP growth will slow to 2.2% in the euro area and 2.4% in the EU as a whole, he said. However, the job market will remain dynamic, with 4.5 million new jobs, including 3.2 million in the euro area. Unemployment will fall to 7.1% in the euro zone and 6.6% across the EU by 2009 - the lowest in more than 15 years - but this is likely to lead to wage rises and skills shortages.

At present, rising commodities prices are pushing inflation up, but this will ease from mid-2008 onwards, with annual average inflation expected to be 2.1% in the euro area and 2.4% in the EU as a whole. Average government deficits will drop to 0.8% of GDP in the euro area and to 1.1% of GDP across the EU, reflecting stronger-than-expected GDP and revenue growth.

Oil prices have risen to more than $90 a barrel, and are likely to remain $10 higher than last year, reducing GDP growth and increasing consumer price inflation, and the rise in the value of the euro could reduce exports. Despite this, global growth is expected to remain relatively resilient.

However, there are downside risks to growth linked to the downturn in the US housing market, said Mr Buti. Global imbalances could unwind in a “disorderly fashion” and countries might bring in protectionist measures. On the other hand the “upside risk” is that wage increases could fuel a growth in private consumption.

Good chance of a ‘soft landing’

Gernot Nerb, Head of Industry Branch Research Ifo Institute for Economic Research, said that although the economic forecast remained positive, it had declined due to the situation in the US. However, despite the drastic drop in the residential building sector, he felt the current problem had been overstated, as share prices had remained high and the economy is expected to pick up by the end of 2008.

In terms of the global economic situation, Mr Nerb said the EU-27 had a 30.5% share of global GDP, the US 27.7%, and China and the rest of Asia 24%. At present China’s share is only 5%, so will be unable to absorb the US’ declining growth, with a negative impact on the EU.

Mr Nerb expected the European Central Bank rates to drop to 4%, with exports and investments in the euro area slowing, leading to an expected 2% growth rate in 2008.

Germany is acting as the engine for European economic growth, he said, with its buoyant order book, growing public consumption and increasing import demands. The country’s budget deficit has practically disappeared, and its national debt will drop close to 60% of GDP.

Unemployment, which stood at 5 million in 2005, is predicted to drop to 3.8 million in 2008, particularly given the long-term fall in structural unemployment.

The most likely scenario for Germany, the EU and the global economy is that, despite the possibility of further small declines, there are “good chances for a soft landing”.

Prospects for jobs in Europe 2008

Goran Hultin, Caden Corporation, SA and adviser to Manpower on European Affairs, said that while it had been assumed last year that strong global employment would continue, today’s picture is more uncertain as financial market jitters spill over into national economies.

Research shows the growth of the service sector throughout the EU, and that China and India are moving into higher value-added services - in fact, Indian employers are now recruiting technological skills outside Asia. World trends show that Asia and the Americas are more capable of translating global opportunities into employment growth, whereas labour regulations in Europe restrict the possibilities of growth.

Mr Hultin said there was tremendous resilience in employment in the US, as companies continued to hire staff, irrespective of the state of the economy. However, in the UK, long-term expectations, which depend on the financial sector, have been hard hit. Despite this, employment is resilient as resources could be reallocated in the labour market.

The outlook for Germany is improving, as it has restructured, is competitive and is a net positive employment creator. Of the other large European economies, Spain’s reliance on construction is a liability in current global conditions, the prospects for France and Italy are mixed as they struggle to break from the difficulties of past years, and the outlook for the smaller countries in EU-15 is positive.