Could Europe Take the Slack Caused by a Slowdown in US Growth?

According to the International Monetary Fund ¨World Economic Outlook¨ published September 6th, in 2006 the World will enjoy a fifth year of consecutive growth with an economy on track to grow at 5.1%. In the European Union, Joaquin Almunia – European Union monetary affairs commissioner - has raised the EU growth forecast from 2.1% to 2.5% for year 2006. In the ¨Macroeconomic and Financial Situation in the European Union ¨ report, presented in Madrid last Septermber, Almunia gave the most upbeat assessment of the Eurozone economy for years, claiming that the economic recovery was robust and that structural reform in the labor, financial and product markets were paying off. He explicitly reported that ¨Economic growth this year is set to be the best we have had since 2000¨ and even expressed confidence in a further economic growth update for 2007 since he believes that the economic reforms will continue. The latest unemployment rate for the Eurozone— 8% in July— together with an accelerating growth driven by a boost in domestic demand and investment are nothing but good news for Almunia for whom the inflation rate is under control at 2.3%. However, according with the mentioned IMF report, this economic boom is predicted to finish in 2007 and – while the IMF agrees with Almunia´s in an unprecedented economic growth for 2006— it forecasts a ¨soft landing¨ for the world economy for 2007, leaded by a slowdown in the US economy, ¨risk to the global outlook is clearly tilted to the downside, there is one-in-six chance of growth falling below 3.25 per cent in 2007¨ a significant decline compared with the 5.1% growth confirmed for 2006. While for Almunia structural changes, employment and domestic growth are the reason for a continuous economic boom, for the IMF the burst will come by a slowdown in the US housing market and the actual surge in inflationary expectations that are forcing central banks to raise interest rates.