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Hopes that economies in the euro zone might be perking up have been dashed by the latest GDP figure as high oil prices and the rising euro take their toll and force governments and economists to lower their projection for next year's growth in the 12-nation bloc.
After a relatively strong first six months in 2004, growth in the euro zone has slowed sharply with GDP rising by just 0.3 percent in the third quarter. The European Central Bank (ECB) earlier this month cut its 2005 growth projection to between 1.4 percent to 2.4 percent, from 1.8 percent to 2.8 percent.
"The recovery is facing headwinds because of higher oil prices and a recent renewed appreciation of the euro," the ECB said.
Latest statistics show that the bloc grew at an annual rate of only 1.2 percent in the third quarter, half as fast as in the first half of this year.
Analysts attributed the sluggishness to a weaker export performance. Over the past couple of years, Europe's economies have been supported by strong export growth. This is now being threatened by the rise of the euro, which has already appreciated by more than 50 percent against the US dollar in the past three years.
Some economists warned recovery in the euro area, which has been long awaited, may already be dearly departed.
The surging euro, which hovered at around US$1.30 in recent months and reached an all-time high of US$1.3470 on December 7, dampens exports and acts as a drag on the economic momentum.
For European companies, the strong euro has not only made their products more expensive abroad but also increased the competitiveness of the imported goods.
Imports shot up an impressive 3.2 percent in the third quarter while exports rose just by 1.2 percent, a substantial slowdown from the 3.1 percent in the second quarter.
In addition, domestic demand has remained relatively weak amid particularly disappointing investment. In the first quarter of this year, fixed investment dropped by 0.3 percent.
Private consumption, too, provided only a slight impulse to growth in the second and third quarters, which both saw an anemic growth rate of 0.2 percent, after a relatively healthy performance in the first quarter with 0.6 percent.
Meanwhile, higher oil prices have also been blamed for dismal economic performance of the euro area, which imports more than 70 percent of its oil supply. Soaring oil prices have significantly increased manufacturing costs and inflation pressure.
But a strong currency also has its advantages.
The rising euro has helped keep a lid on the cost of imported crude oil, which is priced in dollars. It also has helped reduce the area's inflation, which eased to an annual 2.2 percent in November, from 2.4 percent in October.
Some even argue that the strong euro will boost household purchasing power, paving the way for a strengthening of private consumption.
As the export growth is not sustainable, the euro area's recovery in the coming year would be underpinned by an acceleration of investment expenditure and a more gradual pick-up in private consumption.
The ECB predicted that private consumption and total fixed investment in the euro zone should grow 1.1-2.1 percent and 1.7-4.7 percent respectively next year. For the last 18 months, the ECB has been trying to encourage investment and private consumption with a record low interest rate of 2 percent.
Although ECB President Jean-Claude Trichet said he still expected a "gradual recovery" over the next two years despite moderated economic growth in the second half of this year, the untraceable oil prices and exchange rates of the euro will continue to test the recovery strength in the 12 countries using the single currency.
(Xinhua News Agency December 21, 2004)
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