In its Spring Economic Forecast, published last month, the European Commission revised downwards its previous projections. Economic growth is now set "to ease significantly over the forecast horizon" in the euro-area, with outcomes of 1.7% real GDP growth in 2008 and 1.5% in 2009.
This is a half a percentage point lower than the Commission's relatively optimistic December 2007 estimates. The revisions are understandable and reflect the caveats about global uncertainties expressed by the Commission and other forecasting bodies. Nevertheless, the stress on external factors such as energy and raw materials inflation and the continuing turbulence on international financial markets may be diverting attention away from the underperformance of the euro-area compared with other regions. The Commission rightly takes some comfort from the fact that unemployment continues to fall, that the euro-area looks like avoiding a full-blown recession this year and next. Encouragingly, external balances have not been too severely dented by increased import bills:
· The euro-area had a slight trade deficit in March of 2.3 billion euros (3.6 billion dollars) after a small surplus in February, according to first estimates.
· The figures would have been considerably worse if the external value of the euro had not appreciated against other major currencies, notably the dollar.
· Further comfort can be derived from the resilience of export order books which remain significantly above levels for the first quarter of 2008. In particular, the strong performance of German investment goods exports demonstrates the relative inelasticity of demand for Europe's high-tech engineering products. Yet Germany's cyclical recovery and its continuing export success help to conceal the frailties of other euro-area economies. Germany accounts for roughly one-third of all euro-area exports and, according to the latest Eurostat figures, was one of only five members of the zone with a seasonally adjusted trade surplus in March. The consistent trade surpluses of Germany, the Netherlands, Ireland and Finland thus continue to compensate for the sizeable and growing trade deficits of Spain, Greece, Portugal and -- last year -- France.