By David Thomas
Brussels, March 5 (BridgeNews) - Euro zone growth this year will be a whisker under 3% despite a dramatic drop in U.S. growth this year, according to preliminary work being done by EU Commission economists.
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EURO ZONE GROWTH TO STAY FIRM DESPITE DIVE IN U.S.
EC officials are shortly to release their spring forecasts, but preliminary results from the commission's economic modeling process show euro-zone economic growth dropping to 2.9% this year compared with a previous forecast of 3.2%. The revision is marginal alongside the sharp drop the commission forecasts for U.S. growth, which falls to 1.8% this year from the agency's fall forecast of 3.3%.
But while commission officials believe that zone growth will for once overtake the U.S. this year, they are expecting the position to be reversed as early as 2002 when U.S. growth will return to a 3.1% clip, while the zone stays at 2.9%. A more detailed EC statistical breakdown shows the U.S. economy not growing at all in the first quarter before recovering to a 0.5% rate of growth in the second and 0.7 in the third. Also on a quarterly basis, the EC expects U.S. growth to match that of the zone from the third and pass it in the fourth quarter of 2001.
For the world, the EC estimates 2001 growth at 3.4%, down from a previous forecast of 4.0% and 3.9% in 2002 in place of a previous 4.1%.
FORECASTING ROUND HIGHLIGHTS DIVERGENCE BETWEEN FRANCE, GERMANY
The numbers were the subject of a discussion between EC economic officials and national experts Friday. Sources said the discussion highlighted growing pessimism about economic prospects in the zone's largest economy Germany and in the second largest France, where the economic prospects still seem bright. That divergence is underlined by the EC which is cutting its forecast for German growth to 2.5% this year from a previous 2.8%. German growth is seen reviving to 2.6% in 2002 but French growth is likely to be significantly higher than Germany's according to the new EC estimates, at 2.9% this year and 2.7% in 2002.
But the major difference between the two economies is inflation, with French 2001 inflation well below the European Central Bank's 2% price stability ceiling, at 1.4% this year and 1.6% next. German inflation is predicted to reach 2.0% this year before falling back to 1.5% in 2002. Tables below show the zone's third largest economy Italy also caught in a vice of sharply lower growth and relatively high inflation.
Sources suggest that the forecasts are to a certain extent politically contrived to emphasize the scope for monetary easing by the ECB. The forecasts are based on an assumption of only marginally lower rates this year (4.6% in 2001 and 4.5% in 2002) and only a marginal appreciation of the euro ($0.94 this year and $0.95 next). Oil prices are assumed to be $26.5 a barrel this year and $27.0 next.
SKEPTICISM OVER EC'S FORECASTING APPROACH
Forecasters say much of their work has so far focused on the "60,000 dollar question"--whether the U.S. will see a V or a U shaped downturn in growth, that is, short and sharp or long and shallow. Opting for a V, sources say, explains why the forecasts can still show a robust growth outlook for the euro area. However, even internally there are doubts over the accuracy of the EC's approach. One source noted that the estimates are pretty much the same as last time with "just a little bit off" to account for the impact ontrade flows stemming from the U.S. and global slowdown.
There is also skepticism over the whole modeling exercise, a feeling that the commission is taking an insufficiently dynamic approach to modeling the impact of the U.S. slowdown on euro-zone growth and looking too narrowly at just the mechanical trade impact of the downturn on the zone.
"The fact is none of us know what the real effect will be," said one official.
Following are some snapshots from the preliminary commission internal estimates.

GDP (previous forecasts in brackets)
2001 2002
Euro zone 2.9 (3.2) 2.9 (3.0)
Germany 2.5 (2.8) 2.6 (2.8)
France 2.9 (3.1) 2.7 (2.8)
Italy 2.4 (2.8) 2.7 (2.7)
U.S. 1.8 (3.3) 3.1 (3.0)

HICP (inflation)
2001 2002
Euro zone 2.1 (2.2) 1.8 (1.9)
Germany 2.0 (1.8) 1.5 (1.7)
France 1.4 (1.6) 1.6 (1.7)
Italy 2.2 (2.2) 1.9 (1.8) BUDGET (-), surpluses(+) %of GDP 2001 2002 Euro Zone -0.7 (-0.5) -0.5 (-0.3) Germany -1.7 (-1.5) -1.4 (-1.2) France -0.8 (0.0) -1.0 (-0.5) Italy -1.1 (-1.1) -0.9 (-1.0) Unemployment as % of workforce 2001 2002 Euro Zone 8.4 (8.5) 7.8 (7.9) Germany 7.8 (7.8) 7.1 (7.1) France 8.7 (9.0) 7.9 (8.2) Italy 10.0 (10.0) 9.6 (9.6) End Copyright 2001 Bridge Information Systems Inc. All rights reserved.