The World Economy

It is now quite clear that growth slowed in Europe around the end of 1995, and that it remained low in the first quarter of 1996. However, the most recent information suggests that the slowdown is likely to prove temporary. Early indicators for the second quarter suggest that growth has begun to accelerate, much in line with our forecast published in May. We have made no further adjustment to our forecast for EU wide growth this year, with output still expected to rise by around 1½ per cent this year and around 2¾–3 per cent next year. Recent exchange rate developments should help support demand, as the D-mark, the French franc and other currencies within the D-mark bloc have all depreciated against the dollar in the last few months. A number of economies in Europe appear to have some spare capacity, and can increase output, whilst the US is operating at or above capacity, and a reduction in demand should ease incipient inflationary pressures rather more than it reduces output. The depreciation of the D-mark has been associated with a loosening of monetary policy, with short-term interest rates in Germany being a full point lower than they were a year ago. French short-term interest rates have fallen much more, reflecting the disappearance of a significant risk premium last year. The loosening of policy was timely, and should help offset the deflationary pressures that have come from a slowdown in stock accumulation in both France and Germany and from low investment, especially in Germany.