The European Commission lifted its growth forecast for the region significantly on Monday in the wake of strong output data during the second quarter, and said that the recovery was starting to broaden across sectors.
In the latest of its twice-yearly economic forecasts, the commission predicted a growth rate for 2010 of 1.7% in the 16-nation euro area, and 1.8% for the 27-member European Union. Those were upward revisions of around three-quarters of a percentage point compared to the last forecast in May.
It stressed that the recovery was uneven across countries; the upgrade was based on new more positive assessments of France, Germany, Italy, the Netherlands, Poland, Spain and Britain, which account for about 80% of the Union’s gross domestic product.
This unevenness reflects differences in production structures, the scale of adjustment challenges and ongoing rebalancing within the E.U. and euro area.
But it added that the recovery was broadening "across sectors and demand components."
In particular, it noted a better contribution of private investment and consumption to growth in the second quarter of 2010, exceeding the combined contributions of inventories and net exports.
It noted, however, that financial markets were still fragile, having recovered only partly from the tensions experienced in the spring, when investors fled certain European bonds, fearing defaults.
Overall, the new assessment appeared to help bolster European markets. The broad Euro Stoxx 50 index and the FTSE 100 in London both added 1.1% after midday. The euro advanced to $1.2812 U.S. from $1.2678 U.S. late Friday. Yields on benchmark euro-zone government bonds pushed higher -- including those of Germany -- suggesting that investors retain fears about sovereign risk.
The commission stressed that the pace of growth would moderate during the second half, reflecting the softening of the global economy and the fading of the temporary factors that kick-started the recovery. It forecast a 0.5% expansion in the E.U. and euro area in the third quarter, and 0.4% for the third quarter followed by 0.3% in the fourth.
Going forward, financial stability and fiscal consolidation are the priorities, he said.
The commission presented a picture of still-benign inflation, forecasting a 1.8% rate this year for the Union and 1.4% in the euro area. Those forecasts were little changed from May.
Just as the outlook in Europe appears to be improving, the global picture is worrying more analysts, who fear that the United States and some other economies might lurch back into recession.
The Organization for Economic Cooperation and Development said Monday that its July index of composite leading indicators pointed to "clearer signs of a moderation in the pace of expansion to last month’s assessment."
The index is a collation of economic indicators which provide early signals of turning points in business cycles in advanced economies. It fell by 0.1 percentage point in July from June, when it also fell. During the three months before June, the index had risen.
In Canada, France, Italy, the United Kingdom, China and India there are stronger signals of a slower pace of growth in coming months, while there are also stronger signals that the expansion may lose momentum in Japan, the United States and Brazil, it said.
