Brussels 3 July 2003 - According to the latest Quarterly Report on the Euro Area, three factors that have been weighing on growth have improved. The uncertainty associated with the conflict in Iraq is now lifted, inflation is decelerating and financial conditions are becoming more supportive. As a consequence, following virtually no growth in economic activity in early 2003, expectations are still for a modest rebound of activity in the second half of 2003 although cumulative growth in 2003 may turn out to be slightly lower than earlier expected. A recent feature of the euro area economy is a stronger euro and lower interest rates. This combination suggests a higher contribution to growth from domestic rather than foreign demand. Private consumption remains relatively resilient and will benefit from decelerating inflation. Corporate balance sheets have stabilised but corporate adjustment has probably not fully run its course. Slow cyclical adjustment in the labour market has adversely affected productivity and profit margins. Traditionally, the service sector has had an important role in cushioning economic activity during slowdowns. However, due to a number of factors related both to households and the corporate sector, services have contributed considerably less to cyclical stabilisation in the current downturn than in the late 1990s. The report includes a mid-term review of fiscal policy. It finds that budgetary results are likely to fall short of most recent targets in many euro-area Member States. In many countries the size of the emerging shortfall calls into doubt targets for 2004. Euro area Member States are committed to make every possible effort to approach the close-to-balance medium-term budgetary objective and the 2003-5 Bepgs recommend an annual improvement in the cyclically-adjusted budget position of at least 0.5% of Gdp in those countries that have not yet achieved a position close to balance. The report also examines recent developments in the euro exchange rate. Over the last 18 months, the euro has appreciated by over 30% against the Us dollar and by about half of that against the yen and the pound. The competitiveness of euro-area companies is now back at its long-term average and the appreciation is putting downward pressure on profit margins. Fundamental factors such as interest rate differentials seem to have gained strength in explaining bilateral euro-dollar exchange rate movements. Changes in the composition of capital flows into the Us also indicate that investors have taken a more cautious approach towards the Us economy, including in their assumptions for Us productivity growth and the sustainability of the Us current account deficit. The next Quarterly Report is scheduled to be released in September The report is available at: http://europa.Eu.int/comm/economy_finance/publications/ quarterly_report_on_the_euro_area_en.Htm
