Newest EU members underpin growth

The European Union's newest members will bolster Europe's economic growth in 2005, according to a new report.

The eight central European states which joined the EU last year will see 4.6% growth, the United Nations Economic Commission for Europe (UNECE) said. In contrast, the 12 Euro zone countries will put in a "lacklustre" performance, generating growth of only 1.8%. The global economy will slow in 2005, the UNECE forecasts, due to widespread weakness in consumer demand.

It warned that growth could also be threatened by attempts to reduce the United States' huge current account deficit which, in turn, might lead to significant volatility in exchange rates.

UNECE is forecasting average economic growth of 2.2% across the European Union in 2005. However, total output across the Euro zone is forecast to fall in 2004 from 1.9% to 1.8%. This is due largely to the faltering German economy, which shrank 0.2% in the last quarter of 2004. On Monday, Germany's BdB private banks association said the German economy would struggle to meet its 1.4% growth target in 2005.

Separately, the Bundesbank warned that Germany's efforts to reduce its budget deficit below 3% of GDP presented "huge risks" given that headline economic growth was set to fall below 1% this year. Publishing its 2005 economic survey, the UNECE said central European countries such as the Czech Republic and Slovenia would provide the backbone of the continent's growth. Smaller nations such as Cyprus, Ireland and Malta would also be among the continent's best performing economies this year, it said. The UK economy, on the other hand, is expected to slow in 2005, with growth falling from 3.2% last year to 2.5%.

Consumer demand will remain fragile in many of Europe's largest countries and economies will be mostly driven by growth in exports. "In view of the fragility of factors of domestic growth and the dampening effects of the stronger euro on domestic economic activity and inflation, monetary policy in the euro area is likely to continue to 'wait and see', the organisation said in its report. Global economic growth is expected to fall from 5% in 2004 to 4.25% despite the continued strength of the Chinese and US economies. The UNECE warned that attempts to bring about a controlled reduction in the US current account deficit could cause difficulties. "The orderly reversal of the deficit is a major challenge for policy makers in both the United States and other economies," it noted.