Eurozone promises, but with caveats

While talks of the possibility of a double-dip recession were circulating amongst analysts and economists across the globe, the EU dazzled the world with its new eurozone growth forecast of 1.7 percent on Monday, nearly twice the initial forecast for 2010 of 0.9 percent.
This renewed optimism has been backed mainly by a robust increase in numbers for the second quarter, where GDP growth picked up by 1 percent quarter-on-quarter against a growth of only 0.3 percent in the first quarter.
While exports had been behind the surprising recovery, domestic demand also increased, owing partly to the temporary effect of a rebound in construction activities in the second quarter after a severe spell of winter.
In keeping with the pattern of parallel growth, with a lag of a half year or more, seen in labour markets proceeding GDP growth, survey indicators of firms employment expectations point to moderate job creation, according to the Financial Times.
Yet, before one could cheer exuberantly for the EU, growth for the second half of the year is expected to mellow down, although it is still brighter than the initially anticipated growth earlier this year.
The fading of the temporary kick-start factors, constrained consumption in advanced economies with modest lending growth to households and shrinking bank credit to the non-financial corporations are a few factors responsible for a stumped forecast for the latter half of the year.
Besides this, other risks prevail in the form of a turbulent sovereign debt market, budget cutbacks in a number of EU countries and a diminished global demand.
Balancing these risks to some extent is the export-led boost to private sector consumption and spillover from Germanys astonishing growth of over 2 percent, the highest quarterly rate since reunification. Looking ahead the risks look "broadly balanced", according to Olli Rehn, economic and monetary affairs commissioner.
Thus, while modest recovery in the eurozone is expected for the coming quarters, officials need to be wary of the possible risks which may weigh down on the projected growth figures.

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Quarterly GDP Growth 2010     Annual GDP Forecast

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                  Actual     Forecast   May   Sep

                 Q1    Q2    Q3    Q4  2010  2010

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Germany         0.5   2.2   0.6   0.4   1.2   3.4

Spain           0.1   0.2  -0.1   0.1  -0.4  -0.3

France          0.2   0.6   0.4   0.3   1.3   1.6

Italy           0.4   0.4   0.5   0.2   0.8   1.1

Netherlands     0.5   0.9   0.4   0.3   1.3   1.9

eurozone        0.3   1.0   0.5   0.3   0.9   1.7

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Source: European Commission