Will European Union follow United States?

Until very recently, several economic indicators, from GDP growth to business sentiment, have been supporting more economic growth in the Euro Area. Yet, some signs of slowdown started to appear on the beginning of 2008 and the region may follow the U.S. and start suffering from the subprime mortgage crunch.

Industrial production is now falling, European banks are making loans harder to get and consumer confidence is sharply declining. A strong Euro compounds all the problems and makes the situation even worst. The European currency didn't go below 1.4482 against the dollar this year and since January 21, the day when European stock markets went down dramatically, has been going up again. Moreover, due to a strong Euro the export outlook doesn't look very promising. In fact, sales to U.S. and Britain have been shrinking.

Inflation is now a big problem for European Union monetary officials since strong inflationary pressure is not welcome when the economy is slowing down. In January the CPI reached 3.2 percent, the highest level in 14-years and we believe the European Central Bank will keep interest rates on hold to prevent acceleration in price pressures.

Anna Fedec, analyst@tradingeconomics.com
2/5/2008 8:04:52 AM