House price correction threatens EU growth

An unexpectedly sharp correction in house prices resulting from the global credit squeeze poses a significant risk to growth in Europe, according to the European Commission.The European Union’s executive arm forecast a gradual slowdown in growth from 2007 to 2008 but said continuing financial market turmoil meant the risks were “clearly tilted to the downside”.Among the threats it identifies is a worsening of the financial turmoil that could hit housing markets in Europe as well as the US “thereby deepening and prolonging the ongoing corrections”.So far, those European countries that saw the fastest growth in house prices, such as the UK, Spain, Ireland and France, have generally seen an orderly slowdown this year. But the Commission’s latest EU economic forecast hinted at policymakers’ fears of a sharper adjustment. A special section on past house price cycles warned that while other regions were sometimes more volatile, “the historical experience suggests that major housing downturns have also had a substantial macroeconomic impact”.Overall, the Commission expected European economic growth to “hold up reasonably well”. Financial market turbulence would peter out but still hit investment and consumption growth. Tighter financing conditions were likely to affect mainly construction investment and “thereby accelerate the ongoing correction of the housing market in some countries like Spain and Ireland”.Joaquín Almunia, the EU’s monetary affairs commissioner, said: “We consider that investment will continue to contribute positively to growth, but less than in this year or 2006. And in particular, residential construction investment will have a significant correction, and will contribute much less than in the previous periods to our growth.”Housing and construction had contributed enormously to Spanish growth, so the international problems would have a particular effect there, he added.EU growth will slow from 2.9 per cent this year – slightly higher than expected in September – to 2.4 per cent next year and in 2009, according to the Commission. Mr Almunia attributed the downward revision mainly to the financial market turmoil.Growth in the 13-country eurozone would drop from 2.6 per cent this year, to 2.2 per cent next year and 2.1 per cent in 2009.The European Central Bank offered a similarly cautiously upbeat assessment of European growth prospects earlier this week. But like the ECB, the Commission also expressed fears about the impact on inflation of higher oil prices and tightening labour markets – which it said were lifting consumers’ inflation expectations. “This is not a good signal. For this reason we consider in this forecast that the upside risks to inflation are clearly increasing,” Mr Almunia said.Eurozone inflation hit 2.6 per cent last month but the Commission expected an easing of oil prices to lead to a deceleration of price pressures during 2008. Overall eurozone inflation was expected to rise from 2 per cent this year to 2.1 per cent next year before falling back to 2 per cent in 2009.Source - Financial Times