May 29, 2002

The European economy in the medium term; report presented to the AIECE spring meeting, Athens, 8-10 May 2002

Medium-term prospects for economic growth in Europe less bright than for the US due to weaker growth of working age population

Press release
A working group of the leading European institutes projects the growth rate for Western Europe over the medium term at 2.5% per year, against almost 3.5% for the United States, assuming that in both regions actual output returns to potential in the end-year of the projection.

Most of the difference in output growth can be explained by demographic factors. Contrary to popular belief, hourly productivity trends do not differ much.

These are some highlights of the study "The European economy in the medium term", published today by CPB Netherlands Bureau for Economic Policy Analysis. The report has been prepared on behalf of the ‘Working Group on Longer-Term Prospects and Structural Change' of the Association of European Conjuncture Institutes (AIECE). It discusses the medium-term outlook for the European economy taking account of the latest views of its member institutes.
The report contains the most recent medium-term forecasts of 18 AIECE member institutes from 16 European countries, of which 4 transition countries, and by aggregation also the consensus view for the European Union as a whole and - separately - for the transition economies. The first section of the report deals with the theoretical concept of potential output as a basis for medium-term forecasting and policy analysis. The second section deals with structural developments in the global economy over the period 1970-2010. The third section discusses the responses of the AIECE institutes to a questionnaire on their most recent medium-term forecasts.
Potential output in Western Europe is forecast to rise by almost 2.5% per year up to 2010. Hourly productivity growth contributes 2%, which is not much different from the average of the past twenty years. The remainder is explained by the growth of potential employment in total hours worked, which is projected to accelerate slightly to almost 0.5% a year. Rising participation rates explain almost all of the potential employment growth, as the working age population will hardly increase.

Potential output growth in the United States is projected at 3.25% per year up to 2010. Hourly productivity in the American economy increases by slightly more than 2% and potential employment by a bit over 1% per year. The latter increase is almost completely explained by the growing working age population, and this is where the supply sides of the European and the American economy differ most.

The growth forecasts for actual output growth are slightly higher than for potential output growth. Most countries are in excess supply now, and because the negative output gap is assumed to close gradually, the envisaged actual growth exceeds potential growth in the projection. On average, unemployment in Europe is currently above equilibrium level, which should help to contain inflation over the medium term, as labour market weakness is reflected in reduced wage pressure.
It is assumed that the European Central Bank will succeed in keeping the average inflation around its target value of 1.5 to 2%. Moreover, it is generally anticipated that the euro will regain some strength, which helps to keep import costs in check. Public sector financial balances are expected to move towards equilibrium pretty soon. Public debt for the European Union as a whole could decline from 63% of GDP in 2001 to some 56% in 2007.
Medium-term growth of the transition economies (average of Czech Republic, Hungary, Poland and Slovenia) is estimated at 4.5% per year. Here the period after the political transition is too short to allow a potential growth analysis. The unemployment rate could decline by some 2.5 percentage points up to 2007. Consumer price inflation is forecast to decelerate to 3.5% on average. However, public sector debt as a percentage of GDP tends to rise in these countries, albeit from relatively low levels.

Participating institutes in the enquiry are:

Austria    WIFO    Austrian Institute of Economic research    Vienna
Belgium    FPB    Federal Planning Bureau    Brussels
Czech Republic    CCSF    Centre of Conjunctural Studies and Forecasting    Prague
Denmark    DEC    Danish Economic Council    Copenhagen
Finland    ETLA    Research Institute of the Finnish Economy    Helsinki
France    OFCE    Observatoire Français des Conjonctures Économiques    Paris
Germany    DIW    German Institute for Economic Research    Berlin
   IFO    Institute for Economic Research    Munich
   IfW    Institut für Weltwirtschaft    Kiel
Hungary    Kopint    Kopint-Datorg Institute for Economic and Market Research and Informatics    Budapest
Ireland    ESRI    The Economic and Social Research Institute    Dublin
Italy    Prometeia    Associazione Prometeia    Bologna
Netherlands    CPB    CPB Netherlands Bureau for Economic Policy Analysis    The Hague
Norway    SN    Statistics Norway    Oslo
Poland    IKC    Foreign Trade Research Institute    Warsaw
Slovenia    SKEP    Economic Outlook and Policy Services    Ljubljana
Switzerland    KOF    Swiss Institute for Business Cycle Research    Zurich
United Kingdom    NIESR    National Institute for Economic and Social Research    London

Spokesmen

Gerard van Welzenis Read more

The report contains the latest medium-term forecasts of 18 member institutes from 16 European countries, of which 4 Central-European countries, and by aggregation also the consensus view for Europe as a whole. The views expressed in the report do not necessarily represent those of the CPB. The first section of the report deals with the theoretical concept of potential output as a basis for medium-term forecasting and policy analysis. The second section deals with structural developments in the global economy over the period 1970-2010. The third section discusses the responses of the AIECE institutes to a questionnaire on their most recent medium-term forecasts. The Annex presents their answers in full detail.

On the cyclically neutral assumption of a zero output gap in the final projection year, the expected growth rate for Western Europe over the medium term is projected at 2½% per annum, which is not very different from the past 20 years. The GDP growth rate for the United States is estimated at almost 3½%. The higher rate for the US is primarily due to demographic factors. Contrary to popular belief, hourly productivity trends do not differ much. GDP growth in the major Central European countries is projected at 4½% per annum.

Unemployment in most European countries is still above equilibrium levels, which should help to contain inflation over the medium term. Moreover, it is generally expected that the euro will regain some strength, which will keep import costs in check. Public sector financial balances are expected to move towards equilibrium pretty soon.

Public debt for the European Union as a whole could decline from 63% of GDP in 2001 to some 56% in 2007. However, in Central European countries, public debt as a percentage of GDP is likely to rise over the medium term, albeit from relatively low levels.