Brussels lifts eurozone's growth forecast

Financial Times:

The eurozone’s economy will grow this year at nearly twice the pace forecast in the spring, the European Commission said on Monday, mostly because of the growth spurt the region experienced in the second quarter.

Gross domestic product in the currency bloc would grow at 1.7 per cent in 2010, up from the 0.9 per cent forecast in May, the Economic and Financial Affairs directorate said on Monday.

But the European Union's economists warned of “a moderation of growth” in the second half of the year, of 2 per cent annualised in the third quarter and 1.2 per cent in the fourth quarter, down from 4.1 per cent experienced in the three months to the end of June.

In spite of the slowdown, the outlook is still brighter than it was in May, particularly in the third quarter, which was revised upwards from 0.8 per cent to 2 per cent growth. The Commission said that the recovery in the broader EU, “while still fragile, is progressing at a faster pace than previously envisaged”.

The biannual forecast is based on an update to the economic models of the larger EU economies, notably Germany, which stunned economists in the second quarter by growing at a 9.1 per cent annualised rate.

Europe’s largest economy is seen as once again outshining its neighbours, growing at 2.4 per cent and 1.6 per cent annualised in the second two quarters of this year, to finish the year up 3.4 per cent – double the eurozone average.

By contrast, Spain’s economy is expected to contract in the current quarter, by 0.4 per cent annualised, before returning to modest growth in the final months of 2010. Its economy will be 0.3 per cent smaller at the end of 2010 compared with a year earlier, only slightly better than had been forecast in May.

The other large eurozone economies were all revised up slightly, but mostly because of the second-quarter boost.

The report also gave encouraging signs that the European economy is poised to end its dependence on exports to generate demand – the main factor behind Germany’s recent success, but one that many economists fear is not sustainable.

“While exports continued to support the recovery, the second quarter also saw a rebalancing of growth towards domestic demand. Indeed, the contribution of private investment and consumption to GDP growth exceeded the combined contributions of inventories and net exports.”