IMF says growth in euro zone better than expected

The euro zone's underlying growth prospects have taken a lasting turn for the better, the International Monetary Fund's chief…

The euro zone's underlying growth prospects have taken a lasting turn for the better, the International Monetary Fund's chief economist argued yesterday, in comments that could increase the pressure on the European Central Bank (ECB) to make a similar judgment call.

The strength of the economic upswing in the 13-country bloc continued to surprise, said Simon Johnson. Current estimates of its "potential" growth rate - the pace at which it can expand without creating excessive inflation - might be too conservative, he added. "My guess is that potential growth is up a bit, and my guess is that it is down a bit in the US."

Europe had undergone a lengthy restructuring process, "which is really paying off".

His comments at a briefing in Frankfurt come as the ECB considers whether to raise its estimates of euro-zone potential growth on the back of faster productivity growth, although Mr Johnson stressed the difficulties in estimating such measures.

READ MORE

Such a move by the ECB, which would vindicate politicians' claims about Europe's economic turnround, could have significance for future interest rate moves, possibly determining how rapidly it applied the brakes on the economy.

Alan Greenspan won lasting fame when he was US federal reserve chairman for correctly spotting in the 1990s early signs of a technology-fuelled acceleration in US productivity.

The ECB has long disliked talking publicly about concepts such as potential growth rates - not least because of measurement difficulties. But Jean-Claude Trichet, ECB president, has hinted that the Frankfurt-based institute sees the euro zone's speed limit as having risen.

Until recently, the ECB suggested euro-zone potential growth was likely to be at the lower end of a 2 to 2.5 per cent range. But last month Mr Trichet told the Financial Times a rate of about 2.25 per cent or 2.3 per cent would be "an appropriate proxy".

Then, at his regular press conference earlier this month, he added: "We are working a lot on this." Although at that stage he saw no reason to change the ECB's assessment, he said: "If and when we conclude it is time to modify our own estimate of the growth potential of the euro area, I will immediately tell you that."

The latest IMF forecasts, released in April, saw the euro zone economy growing by 2.3 per cent this year and next, but Mr Johnson hinted at upward revisions and argued that the pace of expansion was sustainable.

However, analysts agree that the ECB should be cautious in assessing longer-term trends. European economic statistics are not as up to date or as comprehensive as in the US, particularly on labour market developments. Even if the data were more reliable, it is unclear whether they would provide convincing evidence of a real turnround and that Europe could grow faster without creating higher inflation.

Rigidities in euro-zone markets would also make the ECB wary about over interpreting the data, said Elga Bartsch, economist at Morgan Stanley. The euro-zone rebounded last year after several years in the doldrums.

Powering the revival was the turnaround in German growth. - (Financial Times service)