This Working Paper presents the 2005-2011 macroeconomic outlook for the major areas of the world. The outlook was produced using NIME, the Belgian Federal Planning Bureau’s (FPB) macroeconometric world model and builds on the Autumn 2004 short-term Economic Forecasts made by the European Commission for the year 2004. The Working Paper also features an assessment of the progress made towards the Lisbon goals for growth and employment in the euro area. The major technical assumptions of this outlook as well as a description of the NIME model are presented in an appendix to the Working Paper.
In this outlook, the euro area economy is projected to grow by 2.1 per cent in 2005, compared to 1.6 per cent in the FPB’s current Economic Budget which integrates information for 2005 from the latest business cycle indicators. Euro area growth is driven by a further rise in private consumption, sustained growth in enterprise sector investment and net export growth. In 2006, employment and net exports continue to underpin overall GDP growth, which comes out at 2.5 per cent. On average, the euro area economy grows by 2.2 per cent per annum during the projection period, while the unemployment rate falls to 7.5 per cent in 2011. Inflation remains below the European Central Bank’s 2 per cent ceiling until 2009, but then picks up to come out at 2.1 per cent in 2011. Short-term interest rates rise from 2.4 per cent in 2005 to 4.3 per cent in 2011. Overall fiscal deficits fall from 2.9 per cent of GDP in 2005 to 1.8 per cent of GDP in 2011, while the area’s debt-to-GDP ratio declines from 71.6 per cent to 68.8 per cent over the same period. The euro’s nominal effective exchange rate appreciates by an average 2.4 per cent per annum between 2005 and 2011.
During the 2005-2011 period, GDP growth averages 2.9 per cent for the group of countries comprising the United Kingdom, Sweden and Denmark. Over the same period, the area’s GDP deflator increases by 1.7 per cent on average, while nominal short-term interest rates are raised from 4 per cent in 2004 to 4.9 per cent in 2011. In the New EU Member States, GDP growth remains strong between 2005 and 2011 as it rises by an annual average rate of 3.3 per cent. Robust domestic demand, however, fuels consumer price inflation, which picks up in 2004 and 2005 before levelling off at 2 per cent in 2011. The United States economy expands by an average rate of 3.1 per cent, although fiscal and external imbalances persist. GDP growth in Japan comes out at an average of 2 per cent per annum, as the Japanese economy moves out of deflation in 2006. The rest of the world’s output rises at an average rate of 4.6 per cent, while its prices rise by 5.5 per cent per annum during the 2005-2011 period.
This Working Paper also features an assessment of the progress made by the euro area regarding the EU’s Lisbon Objectives for growth and employment. The outlook highlights that without an acceleration of structural reforms, the euro area will fail to reach the Lisbon Objectives by 2010. Simulations with the NIME model illustrate the opportunities and limitations of different policy measures that might be considered in view of reaching the Lisbon objectives. When considering the possible budgetary implications of the new measures, however, the simulations underline the difficulty of reconciling the goals of higher growth and full employment with short-term fiscal adjustment.
Finally the reader should be aware that this outlook has not been used for the FPB’s 2005 economic forecast for Belgium (February 2005).