950816

Europe today

Slow growth no

sign of recession,

economists say

LONDON: Less than two years after staging an impressive recovery and six months since economists predicted a stellar year, Europe's economy is slowing down.

This gulf between outlook and outcome owes much to turmoil in currency markets earlier this year, as well as deficit-cutting tax increase and deteriorating world economic prospects.

However lackluster the prospects, few economists worry about recession. Prospective tax cuts in several European countries and relatively low interest rates should ensure sustained recovery.

Lehman's latest forecast for Europe forecasts growth slowing to 2.7 percent this year from 2.9 percent in 1994. That contrasts with an Organization For Economic Cooperation and Development projection on May 10, which forecast European growth accelerating to 3 percent from 2.4 percent last year.

Weaker domestic and foreign demand is increasing inventories across Europe, though the extent is difficult to measure because of inconsistent statistics. The buildup of unsold goods is likely to be temporary because relatively low interest rates encourages consumption, analysts said.

"We may be surprised by the extent of the weak growth in the last few months of the year," said Andrew Milligan, chief economist of New Japan Securities. "But that's an awfully long way away from saying you're heading for recession."

What's more inflation is low in much of Europe, which means central banks are unlikely to endanger recovery by raising rates.

"There are no major shocks that could trigger a policy tightening which would force Europe into recession," said Guenther Thuman, economist at Salmon Brothers in Frankfurt.

Across Europe, however, business is expressing concern at the outlook.

In Germany, business confidence has been hurt by high wage settlements and a strong deutsche mark, though analysts said the strong currency is unlikely to hurt exports this year.Meanwhile, consumer spending has fallen as higher income taxes bite.

As a result, German companies sound cautious even as many of them report huge profits. SAP AG, Europe's largest software developer, for example, posted an 80 percent surge in first-half profit, but cautioned it is "unlikely" to sustain that rate.

German economists expect the western German economy to grow little more than 2 percent this year and next. That isn't enough to reduce unemployment, said Salomon Brothers' Thuman.

Likewise, widespread expectations of strong economic growth in France also have dminished. Modest declines in French jobless rates are the result of costly state-finaced job programmes rather than robust growth.

France also has a strong currency, and although its exports aren't likely to be hurt significantly for months to come, drug-and chemical maker Rhone Poulenc SA has said it was "perturbed by the drop in the dollar."

Consumer confidence and household spending have declined, Maillard said. Together with weak US growth, stagnant Japanese economy, declining growth or outright recession in Latin America and easing expansion in Asia, he said, this should limit growth in France to less than 3 percent this year and next. That's down from 3.5 percent forecast earlier this year.

In Britain, where recovery began more than a year before the rest of Europe, growth also is flagging. After growing 4 percent last year, the economy is expected to grow by less than 3 percent in 1995, easing further next year.

Increased taxes, high personal debt, falling house prices and rising interest rates have held consumption down.

Helped by a weak pound, Britain's boom was led by exports and manufacturing. Now, however, world and domestic demand have caused output to slow and inventories to grow, pointing to even softer output later on.

Even Europe's weak-currency states no longer can count on booming exports to sustain their economic expansions because demand is slowing worldwide, said Talal Shakerchi, a fund manager at Old Mutual International in Guernsey, which has $2.7 billion under management.

High levels of public debt in Italy, Spain and Sweden have resulted in quickening inflation, higher rates, public spending cuts and tax increases. Spanish consumer confidence has suffered as a result while in Sweden a tighter economic policy has pushed the unemployment rate up.

Sweden's jobless rate was 10.3 percent in July, the highest since the 1960s, compared with 8.2 percent in June.

By contrast, Italy's strong private sector, robust exports and personal wealth counter the growth-dampening effect of public debt. Growth this year may exceed last year's 2.2 percent, though much depends on whether the political situation stays stable, and whether inflation forces the Bank of Italy to rise rates.-Rueter