The euro zone economy is on course for growth next year of about 2% despite the euro's record-breaking rally against the dollar, the European Union's executive arm said in a quarterly report today.
'While the easing of growth momentum in the second half of the year suggests that downside risks have not abated, the European Commission's basic scenario of growth in the euro area of about 2% this year and next still stands,' EU economic affairs commissioner Joaquin Almunia said in the report.
In the third quarter of 2004, the 12-nation area's economy grew by 0.3% compared with 0.5% in the previous three months, the new report recalled. But it said that 'economic activity did not decelerate everywhere in the euro area; it even strengthened in several countries'.
'Changes in third-quarter growth were dominated by large swings in the most volatile components of demand and should therefore be interpreted with caution,' the report added.
Many economists have more gloomy predictions than Brussels on where the euro zone economy is headed next year as it struggles to emerge from a three-year slowdown. The euro's rally against the dollar in particular, it is feared, will dent growth in European exports by pricing them out of world markets.
But the commission report said that 'the appreciation of the euro against the dollar is essentially the result of the dollar's weakness and that its recent evolution against other currencies has been much less pronounced'.
Commissioner Almunia also said that the euro's strength and 'moderate labour cost growth' should help to get euro zone inflation back under the European Central Bank's target of 2% by next summer.
For the final quarter of 2004, the EU report said leading indicators pointed to 'muted growth' because of weakening business confidence.
'However, this is counterbalanced by positive news on the investment side and the fact that some indicators have behaved better than expected in September and/or October,' it said. Such positive indicators included retail sales and new orders in the euro area, as well as industrial production in Germany and France, the zone's two biggest economies.
