Euro zone growth faces short-term risks as the euro's rise to record highs against the dollar hurts exporters, the European Commission said on Monday. Its quarterly report on the euro zone economy sought to put the best gloss on the clouded outlook by pointing out a more encouraging outlook for inflation and sticking by its forecast that the bloc's economy would grow 2 percent this year and next.
It also blamed broad dollar weakness for recent swings that have seen the euro scale record highs against the US currency.
Still, data in the report show the toll that the euro's rise on the foreign exchange markets was taking on exporters and the risks highlighted by the Commission were mainly on the downside.
"Risks to the short-term growth outlook have not abated, particularly since sharp and disorderly exchange rate adjustments may entail export losses," the report said.
The director of the European Union executive's monetary affairs division, Klaus Regling, told a news conference to present the report that 2004 growth could be 0.1-0.2 percentage points below the Commission's forecast of 2.1 percent.
The report said losses in competitiveness were increasingly weighing on euro zone exports, translating into a loss in export market shares of about five percentage points in three years.
Nevertheless, the Commission insisted that the euro was not wildly out of line with economic reality and pointed out that its strength was helping to keep euro zone inflation in check.
The euro's appreciation has also reduced the impact of rising oil prices, which are denominated in dollars.
The Commission predicted that headline inflation would remain above 2 percent in the first months of 2005 due to persistent inflationary pressures from higher oil prices.
But inflation could subside more quickly than forecast in 2005 as oil prices have fallen back more rapidly than expected.
Turning to domestic demand, it said consumers in several euro zone countries remained cautious about spending as the lack of any clear pick up in the labour market was continuing to feed concerns about unemployment and personal finances.
There was more positive news on the investment front but the Commission said it was still too early to tell how the euro's renewed appreciation would affect corporate investment.
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