The euro zone economic recovery is under way but continues to be hampered by a strong euro exchange rate and hesitant consumers, the Organisation for Economic Cooperation and Development (OECD) said today.
In its annual economic survey of the single currency area, the OECD left key growth, inflation and unemployment forecasts for the region unchanged from those in its OECD-wide economic outlook in May.
"The economy is past the turning point, but the strong euro and downbeat consumer sentiment are likely to weigh on the strength of the recovery," the OECD said in the report.
Its central projections for the euro area see gross domestic product growth accelerating to 1.6 per cent this year from 0.5 per cent in 2003. The recovery should then pick up more momentum in 2005 and growth of 2.4 per cent is forecast - rising above the region's long-term potential for the first time since 2000.
"The OECD is projecting the recovery to gather steam in 2005, with growth of 2.5 per cent ," the report said. "Unemployment is projected to stay stubbornly high, while inflation is expected to ease below 1.5 per cent in 2005."
Harmonised consumer price inflation rates are expected to slip to 1.7 per cent this year from 2.1 per cent in 2003 and fall further to 1.4 per cent in 2005. Unemployment is seen unchanged from last year at 8.8 per cent in 2004 but should dip to 8.5 per cent next year as employment growth picks up to 1.1 per cent from 0.4 per cent this year.
The OECD did not give any explicit forecast for European Central Bank interest rates but said "monetary policy has remained supportive of economic activity". It said that since the June 2003 ECB rate cut to 2 per cent, the euro appreciation has reduced external price pressures.
"The OECD projections assumed the main policy rate to be cut by another 50 basis points last spring, and to be maintained at 1.5 per cent until the recovery is firm and inflationary pressures start building," the report said, without specifying if it had changed that assumption.
Elsewhere, one minor change to its forecasts was a cut in the household savings ratio for the region to 11.7 per cent in 2004 and 11.8 per cent next year - from 11.9 per cent and 12.0 per cent respectively in May.
The rest of the report concentrated on long-term fiscal and structural issues.
The OECD said changes to the European Union's budgetary Stability Pact would be necessary but that the existing rules were the "minimum required" to cope with the long-term pressures from aging populations.