The European economy: Macroeconomic outlook and policy

In 2005 the world economy still developed strongly, but, with GDP growth of 41/2 percent, at a somewhat slower pace than in 2004. Developments still differed substantially among major regions. Whereas output continued to increase in a robust and strong manner in the US and it showed a clear upward, but still somewhat volatile trend in Japan, European real GDP grew only at a moderate pace. This year the world economy is expected to grow at an almost unchanged pace of around 41/2 percent, but this time with a somewhat more even distribution across the major regions. In the US, the expansion of real GDP is expected to slow down somewhat, not least due to a less accommodative monetary policy. Japan is likely to continue its recovery, but the Chinese economy remains the engine of economic growth in Asia, although the fast pace of expansion is expected to weaken slightly. The pace of expansion in the European economy will increase somewhat. In the euro area, real GDP growth is, with a rate of 2.0 percent, forecasted to exceed potential growth somewhat. Economic activity in Europe will be supported by strong, but in the course of this year moderating, export growth. Domestic demand will accelerate gradually, offsetting the slowdown in external demand. The chapter points to the risk of an undesirable mix between monetary and fiscal policies in the euro area: the ECB is likely to tighten monetary policy in response to the cyclical upswing, whereas the stance of fiscal policy will probably remain more or less unchanged. Instead, for reasons of long-run sustainability structural budget deficits in the euro area should be reduced.(This abstract was borrowed from another version of this item.)