Export-Led Recovery in Europe under a Falling Euro

I. Global Assessment and Outlook Recent monthly indicators and quarterly national accounts confirm that several industrial countries, especially the major European economies experienced a at the end of 2004 and in the first quarter of this year. In the last quarter of 2004, the combined output of the economies in the Euro Area edged up by an annual rate of 0.8 from the third quarter. Although the overall growth rate in the Euro Area grew at an annual rate of 2 percent in the first quarter of 2005, Italy's output declined for a second quarter in a row and the Netherlands registered a negative growth rate after zero growth in the previous quarter; output growth in France - the second largest economy in the Euro Area - slowed down substantially to an annual rate of 0.8 percent from 2.8 percent in the previous quarter, while Belgium recorded zero economic growth. Monthly indicators also point out to the Euro Area soft patch. Consumer confidence dropped sharply in May to its lowest level in twelve months. Industrial sentiment declined in May for the sixth consecutive month after a solid 14-month upward trend which peaked in October of 2004. The Euro Area composite sentiment index - which combines attitudes of consumers, business, construction, retail and services - declined in May for a fourth month in a row. Economic growth in non-continental European industrial countries continued to be strong in the first quarter of this year. The United States economy, the leader of the current worldwide recovery, expanded at an annual growth rate of 3.5 percent in the first quarter of 2005, slightly lower than the 3.8 percent growth rate recorded in the previous quarter. In the other English-speaking economies - the United Kingdom, Canada and Australia - real output growth enjoyed solid gains in the first quarter of 2005, growing by annual rates of 2, 2.4 and 2.8 percent respectively. Following three quarters on nonpositive economic growth rates, output growth in the Japanese economy bounced back by an annual rate 5.2 percent in the first quarter of 2005. Recent economic activity indicators from Emerging Asia, the second important driver of the current global recovery, have continued to be strong, particularly from the fast growing populous countries of China and India. On a year-to-year basis, in the first quarter of 2005 Chinese real output expanded by 9.4 percent compared to the same quarter a year ago. In India, real output jumped 6.2 percent in the last quarter of 2004; in the first three months of 2005, industrial production increased by 6.6 percent from the same period a year ago. Despite the European soft patch at the end of 2004 and the beginning of 2005, our global economic forecast remains optimistic as the fundamentals still point to strong expansion in the world economy. The European slowdown is not the beginning of a hard landing for the Euro Area's economy. The economies of the continental Europe are expected to bounce back with the global upswing. The upbeat prospects rest on both a continuation of investment activity in the world's largest economies and a deepening in international trade. Driven by a falling Euro, European exports to a growing global economy and domestic investment are expected to revive growth momentum. The continuation of growth in the United States, the transformation of China and India into a source of industrial powers and the long-awaited revival of the Japanese economy will maintain growth in international trade at high levels. The volume of world trade in goods and services is projected to grow by 7.5 percent in 2005 and 7.8 percent in 2006, following a surge of 9.9 percent in 2004 and a bounce of 4.1 percent during 2002-03 from the global recession of 2001. In the last year, the engine of global growth was fueled more by capital expenditures than consumer spending. Over the forecast horizon, the strength of the global economic upswing is expected to be kept up by business expenditures on capital goods. …

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