The 'Euroland' economy is projected to grow by only around 1.5% in 2004, compared to around 3% in the UK and around 4.5% in the US, according to a new report by economists at PricewaterhouseCoopers (PwC).

The latest European Economic Outlook published today indicates that German and Italian growth will recover gradually; France should achieve 2% growth in 2004; and that Spain is likely to remain the best performer of the larger European economies.

John Hawksworth, UK Head of Macroeconomics at PricewaterhouseCoopers, said: “The Euroland economic recovery is still very fragile, so this is not the time to be raising taxes or cutting spending, or to be tightening monetary policy. Indeed, although the ECB seems likely to keep interest rates on hold for the moment, they need to stand ready to cut rates again to keep the recovery on track if there should be signs that it is faltering.”

Outside of Euroland, the report paints a more optimistic picture. The UK economy is expected to maintain its recent generally positive performance in 2004, growing at an above trend average rate of around 3%. Inflation should remain under control in this scenario, but interest rates are likely to continue to rise gradually over the next year, slowing GDP growth to an average of around 2.5% in 2005.

Mr Hawksworth said: “For the moment, the UK economic outlook looks healthy, but the medium-term picture is less clear: interest rates have further to rise and the housing market appears increasingly overvalued. We expect consumer spending growth to decelerate significantly in 2005, but are hopeful that higher growth in exports and business investment will offset this to some degree.”

This year, PwC predicts that the Athens Olympics should help make Greece the top Euroland performer in 2004, but the Greek economy could show a significant slowdown in 2005.

The main scenario set out in the PwC report is for growth to remain sluggish at around 1.5% in 2004, before picking up gradually to around 2.25% on average in 2005.

But the report argues that risks to growth are currently still weighted to the downside, given that the Euroland economic recovery remains fragile and will not be helped by the continued relative strength of the euro and the recent rapid rise in oil and other commodity prices.

Looking ahead to 2005, the report also notes that it is possible that the Euroland economy could pick up steam faster than anticipated over the next year. A possibility if there is continued strong US and Asian growth combined with near zero real interest rates in the euro area, but that this very much depends on the European recovery being maintained in the short term.

The report highlights "considerable uncertainties" over the medium-term sustainability of the US recovery, particularly in the light of large US budget and trade deficits.

(SP)