Will Europe follow United States?

The Euro Area economy is likely to continue to slow down in the next two years due to the turmoil in world financial markets. But, will this drop in economic growth be significant and to which degree will it follow the U.S.?

The IMF estimates that the real growth in 2008 and 2009 may be reduced by about ¾ pp when taking into account the effects of rising lending rates, reduced access to funds and likely probable decline in asset prices. Moreover, growth in the 15-nation Euro Zone could fall to 1.5 per cent from 1.7 per cent, according to the latest European Commission forecasts. However, although, the U.S. financial crisis is now spreading across the world, it’s very unlikely that it will affect Euro Area to the same extent as it did on the US.

So far, with nine months into the U.S. financial crisis, Euro-zone growth is holding up very well.  The European Central Bank policy of unchanged interest rates seems to be effective and a strong Euro still hasn’t influenced the trade balance. Furthermore, the degree to which Euroland follows the U.S. greatly depends on whether a U.S. recession is driven by a domestic or a global shock. In fact, the U.S. is being hit by two shocks: housing and financial and only the latter is of global extend. Still, the only country within Euro Zone which may be exposed to the housing meltdown is Spain. Yet, given that it accounts for just 15% of Euroland GDP it shouldn’t bring the overall economic growth down. In fact, loan growth in Euroland has continued to grow at about 11%yoy. Furthermore, the private sector in EU runs a savings surplus of about 1% of GDP while its US counterpart  runs a savings deficit of 2%-3% of GDP. Also, while Euroland households run a savings surplus of close to 2% of GDP, in the US they are running a 2% deficit.

Anna Fedec, analyst@tradingeconomics.com
4/29/2008 7:24:03 PM