Euro zone GDP to grow above trend in 2000-01 LONDON: The euro zone economy will grow comfortably above its long-term trend rate this year and next, economists forecast, and this cyclical upswing might turn into something more permanent. In a Reuters poll, economists saw gross domestic product growing 3.05 percent this year, according to the median of 34 forecasts, and virtually holding that level in 2001. That compares with 2.2 percent last year. Most of this is thanks to the economic cycle turning back in Euroland's favour, helped by the euro's plunge and stronger global demand. But more optimistic euro zone watchers think the economy may shift into a higher gear as governments finally tackle structural problems with employment and taxes. Euroland's economic reputation has taken a pasting in the past year. Perceptions that Europe lacks the inspiration and vigour to match a booming United States have helped to drag the euro down 17 percent since its launch 13 nonths ago. A euro below $1.00 may bruise the European ego but it will also help exporters and the wider economy for some time yet. Reviving overseas demand for euro zone goods, notably in east Asia, will also help. "We expect the euro to remain weak throughout 2000 around current levels, which will give quite a boost to exports," said Philip Chitty at ABN Amro in London. Three percent GDP growth is above the long-trend trend rate of about 2.75 percent. But it is only a little above the 2.7 percent set in 1998, hardly a vintage year, and many economists remain sceptical about how long the recovery can last. "I think it is mainly a cyclical recovery. It is not clear whether the long-term prospects for the Euroland economy have actually changed," said Lorenzo Codogno at Bank of America in London. On the one hand governments were moving slowly with structural reforms but on the other, corporate Europe was moving fast, with deals such as Vodafone's 170 billion euro takeover of German telecommunications group Mannesmann. Some economists feel even the cyclical upturn will not last long. HSBC agrees with the consensus this year, forecasting growth at 3.0 percent, but not for 2001 when its sees only 2.1 percent. HSBC economist Gwyn Hacche saw long-term interest rates rising and the dollar correcting after its long climb against the euro. "The bond yields hit the domestic economy, then the higher euro hits exports," he said. HSBC also expects a sharp correction in stock markets, led by Wall Street, to hit the European economy. But Alexander Kockerbeck at Dresdner Kleinwort Benson in Frankfurt believes that the "Big Three" euro zone nations are finally stirring on tax and labour market reform. After several years of false starts, Germany plans big company and personal tax cuts next year. France is also aiming for 120 billion francs in reductions and Italy will have to follow suit to remain competitive. "For first time in many years things are changing," said Kockerbeck. In the latter years of the 1990s governments struggled to cut their budget deficits to three percent of GDP, the Maastricht Treaty target for joining monetary union. That left no scope for tax cuts. But the growth revival has transformed public finances, with the overall euro zone budget deficit forecast to fall to 1.2 percent of GDP this year and 1.0 percent in 2001 from 1.6 last year, according to the poll taken February 7-11. "This time we really have scope to bring down taxation," said Kockerbeck. Labour reforms could follow and France has already created hundreds of thousands of new jobs. Unemployment, a few months ago a seemingly insoluble problem, is falling slowly but steadily -- the rate dropped last year from 10.6 percent in January to 9.6 percent in December. More Europeans in work means stronger domestic demand and consumer confidence. Economists in the poll saw the jobless rate falling further to 8.4 percent by the end of 2001, helped by a demographic fall in the numbers of young people joining the labour market. This points to sustained higher economic growth with the trend rate rising from the present 2.5-3.0 percent, said Kockerbeck. "We can imagine that deregulation, new technology and productivity gains can push the trend growth rate to 3.5 or 4.0 percent. I think we could see this in two to three years." (Reuters)
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