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Europe follows United States on its
way to recovery with a one quarter lag
Economic activity in the Euro Area was weak in the second half of 2001 and
will probably remain so in early 2002. Data on real output for November
remained weak, in particular the industrial production decrease of 4.3%
year-on-year in November, which following on the 2.7% October contraction,
surprised negatively. Nevertheless, there is increasing evidence
supporting the improved prospects for a gradual recovery in the course of
this year. According to recent Euro Area survey data, the general decline
in confidence may have come to an end. The January 2002 European
Commission economic sentiment indicator confirmed a reversal from the
negative trajectory observed since the end of 2000, as the aggregate
indicator for the Euro Area rose by 0.1 percentage points, following the
0.3 percentage point increase observed in December last year.
The change in the economic sentiment indicator was positive in eight of
the twelve Euro Area member states (Belgium, Germany, Greece, France,
Ireland, the Netherlands, Austria and Finland), while it remained stable
in Italy. The increases were particularly significant (0.5 percentage
points or more) in Ireland and in the Netherlands. In Spain and Portugal,
the indicator dropped by 0.4 percentage points and 0.6 percentage points
respectively. The positive developments are mainly due to the favourable
evolution observed in the industrial sector, whereas the consumer
confidence indicator remained broadly stable. In addition, the confidence
indicator for construction and retail trade fell. Given that the European
Central Bank (ECB) expects a further decline in inflation, financing
conditions in the Euro Area are likely to stay favourable, providing a
solid backdrop for higher growth in real disposable income, which should
boost domestic demand. The improved economic fundamentals have led the
majority of analysts to believe that the Euro Area economy bottomed out in
the fourth quarter 2001 and will pick up speed throughout 2002.
Nevertheless, the Consensus maintains a conservative outlook for economic
growth this year at 1.1%.
Japanese economy continues nosedive
and faces another year of recession
The only economy to suffer a further downward revision is Japan. The
country is indeed in a dire situation. The financial sector faces further
turbulences and despite increasing concerns over the state of the economy,
Prime Minister Junichiro Koizumi, is facing increased difficulties in
realising his structural reform platform as his political credibility is
eroding. After sacking his foreign minister, Koizumi secured legislative
approval for his economic bill, which includes an extra fiscal stimulus
package of US$ 19 billion. But the additional government spending is
unlikely to kick-start the ailing economy. In December, unemployment
reached 5.6%, the highest figure since the Second World War and the
additional data suggests that this number will rise further this year.
The leading index for Japan decreased 0.3% in November, continuing its
steep and widespread decline for the sixth consecutive month. The market,
which was not outright optimistic about the economic prospects is turning
increasingly pessimistic and now expects the economy to contract 1.0% this
year, 0.4 percentage points worse than last month’s forecast.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing for Latin America. For
more details please click here.
For five-year forecasts,
please click here.
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