Euro zone heads for a soft landing

Economic growth across the euro zone is likely to slow to around 2 per cent this year, but the new currency area will probably benefit from a "soft landing", according to a new report. This outcome could be bad news for Ireland, however, pushing the economy into an inflationary cycle.

The first edition of the PricewaterhouseCoopers (PwC) European Economic Outlook, released yesterday in Brussels, suggested businesses should consider two alternatives for the euro zone economy.

The consultancy firm's chief economist, Ms Rosemary Radcliffe, said the first, a "soft landing", would see the global economic crisis abate, the euro stabilise against the US dollar, inflation remain subdued and growth dip from its current level of 3 per cent to around 2 per cent this year. Economic growth would then pick up again in 2000.

A "hard landing" would occur if the global economic situation worsened, especially in the US. This would see businesses squeezed between weakening external demand and an excessively strong euro, which could in turn generate strong deflationary pressures, she said. Growth would drop to 1 per cent this year and even lower in 2000.

"At present, the balance of probability is still, we think, in favour of a soft landing - but I would have to say only just," Ms Radcliffe said. "The euro zone economy is still fundamentally healthy, but it is not immune to global economic developments. If there are any further signs of deteriorating confidence in the euro area, the European Central Bank will need to act decisively to cut interest rates."

Germany and Italy are expected to be the slowest-growing economies in the euro zone, with Britain, not yet a participant in EMU, faring even worse. The report says smaller economies such as that of Ireland, Finland and Portugal will continue to head the European growth league.

The consensus forecast is for Irish GDP growth to slow to 6.4 per cent this year, the report says. Domestic demand growth would remain strong in this scenario, due to the strong momentum in the economy, while export growth would be somewhat slower.

"Economic policymakers may not be able to control overheating that is becoming apparent in the economy as both monetary and fiscal policies are restrained," the report says. "A `soft landing' scenario could push the Irish economy into an inflationary boom in 19992000, with economic policy limited in its ability to restrain accelerating inflation."