24 March 2006 • Euroframe – European Forecasting Network: Economic Assessment of the Euro Area – Forecasts and Policy Analysis. Spring 2006 • Ewald Walterskirchen

GDP growth in the Euro area is forecast to rise in 2006 to 2.2 percent, well above the 2005 outturn of 1.4 percent. Growth will ease slightly in 2007 but, at 2 percent, will still be stronger than in recent years. From Austria's perspective, the important feature of the forecast is that stronger growth in the Euro area will translate into stronger demand for Austrian exports.

The European Forecasting Network "Euroframe" comprises ten of the most respected economic forecasting and research institutes in Europe, including WIFO. On behalf of the European Commission, it produces bi-annual reports on the Euro area covering economic forecasts, regular policy monitoring and special policy topics.

Today sees the launch of the network's report for Spring 2006. Among the findings contained in the report are the following:

• GDP growth in the Euro area is forecast to rise in 2006 to 2.2 percent, well above the 2005 outturn of 1.4 percent. Growth will ease slightly in 2007 but, at 2 percent, will still be stronger than in recent years.

• Unemployment will fall, largely as a result of the pick-up in growth. For 2006, a rate of 8.1 percent is forecast, down from 8.5 percent in 2005. This improving situation will continue into 2007 when the rate of unemployment is forecast to fall further to 7.8 percent.

• Inflation in the Euro area will remain slightly above the ECB target, at 2.2 percent in 2006 and 2007. This forecast assumes that the euro-dollar exchange rate averages Euro 1.21 in 2006 and Euro 1.22 in 2007 and that oil prices average $ 59 a barrel in 2006, falling slightly to $ 56 in 2007. The ECB is forecast to continue raising interest rates but only at a moderate pace. Key rates are forecast to rise by 50 basis points by mid-2007.

Given the existence of a flat yield curve in the USA and the role it has occasionally played as a leading indicator of recession, some commentators suggest that a downturn in the USA is approaching. The network does not share this view and instead, side with the majority of professional forecasters, is seeing strong growth continuing in the USA in 2006 and 2007. Nevertheless, the network warns that the on-going imbalances in the US economy continue to provide a downside risk to forecasts for the Euro area.

The report also contains a special chapter on the Euro area enlargement. Its main points are:

• Euro area enlargement by the new member states of the EU will, in all likelihood, start next year. However, it will be a number of years before all ten countries of Central and Eastern Europe will have introduced the euro.

• The new member states stand to gain substantially from the adoption of the euro. The lower interest rate in the Euro area will promote catch up growth, while financial stability will be enhanced due to the elimination of exchange rate risk to the euro. Given the large current account deficits, being a member of the Euro area will eliminate the risk of a currency crisis following sharp reversals of capital flows.

• Because of the small size of the new member states, the enlargement will affect the Euro area's growth and inflation rates only to a limited extent. Both rates will nevertheless slightly rise without affecting the dynamics.

From Austria's perspective, the important feature of the forecast is:

• Stronger growth in the Euro area will be good for Austria because it will translate into stronger demand for Austrian exports.

For further information please contact Ewald Walterskirchen, WIFO, phone +43 1 798 26 01 ext. 257, Ewald.Walterskichen@wifo.ac.at or see http://www.euroframe.org Euroframe-EFN project