EU industry lobby UNICE says recovery at risk from oil price rise

BRUSSELS (AFP) - The high level of oil prices is posing a risk for the European economic recovery, European Union industry lobby group UNICE said.
"Economic recovery is most immediately at risk from energy price developments," UNICE said in its latest six-monthly economic outlook.
It said the rise in oil prices over the past year was likely to hamper the current upturn.
The employers group joined a rising outcry in recent weeks that high oil prices were forcing economic growth forecasts lower.
UNICE members expected the price of crude to be between 35 and 40 dollars a barrel in February 2005, compared with current levels of around 50 dollars, but this would still leave it near the 46-dollar level at which they say the European economy starts to be significantly hurt.
"Oil price variations are the most immediate source of concern for European companies," the employers federation said.
A sustained oil price rise of 10 dollars a barrel would reduce expected 2005 growth by 0.3-0.5 percentage points, the organisation said.
But it said the precise impact would depend on individual countries' dependence on oil, the reaction of the European Central Bank and the euro exchange rate.
UNICE said the EU economic recovery was continuing but lacked momentum.
It raised its forecast for the 12-state eurozone's 2004 gross domestic product (GDP) growth to 2.1 percent from 1.9 percent, but left its 2005 forecast unchanged at 2.2 percent.
The full 25-state EU is projected to record growth of 2.6 percent in both 2004 and 2005, it said.
It said inflation remained under control despite the oil price rise, with eurozone inflation expected to average 2.1 percent this year and 1.9 percent next year.
But the economic recovery is still dependent on export demand coming from strong growth elsewhere, it said.
"Growth depends on external factors and is still not sustainable. The robust export contribution to the variation in GDP results from buoyant external demand, rather than a significant gain in (Europe's) share of international markets," said Jean-Paul Betbeze, chairman of UNICE's economic and financial affairs committee.
Any major strengthening of the euro's exchange rate would therefore be unwelcome, the organisation said.
"Any euro appreciation and volatility would harm European enterprises doing business in international markets, thus cutting away the sole leg on which the recovery is based," it said.
It said a euro exchange rate above 1.28 dollars would significantly hurt the European economy. The euro is currently at around 1.25 dollars.
Meanwhile, private consumption remains weak and although unemployment is expected to decline slightly next year, it remains high, UNICE said.
"This situation will not change unless major labour market rigidities are removed," it said.
The eurozone jobless rate was projected to fall to 8.7 percent next year from 9.0 percent this year.
UNICE said it hoped that the European Central Bank would keep interest rates low as long as the recovery remained vulnerable.
"Many federations consider it necessary to keep interest rates low given the fragile state of the eurozone economy and as long as the mandate of the ECB is met," it said.
It said recent Bank of England rate rises had been justified but British rates were probably now at or near their peak for this cycle.
The organisation expressed reservations about the European Commission's proposals for reform of the EU Stability and Growth Pact, particularly the idea of allowing countries experiencing a long period of slow growth to breach the pact's 3.0 percent of GDP deficit limit.
"The proposal to provide an exception to slow-growing countries would be a bad signal for European competitiveness," it said.
"Relaxing the rules for countries with a 'protracted period of sluggish growth' will give the wrong incentives for bad performers to slow down the necessary reform process. This will also penalise the good performers."