The International Monetary Fund today raised its euro zone economic growth forecast for 2004 but warned that the region's longer-term economic potential was ebbing, advising urgent remedial action and reforms.
Released following annual consultations with European officials representing the single currency area, the IMF report raised the Fund's 2004 forecast for gross domestic product growth to 2.0 per cent from the 1.7 per cent projected in April.
Although it agreed with EU officials on a central case that domestic demand would eventually sustain this recovery, the IMF said it was more wary of the risks to the demand outlook than either the European Central Bank or the European Commission.
Longer-term concerns about the aging of the euro zone workforce and falling labour utilisation -- defined as annual hours worked per capita -- were even more worrying, it said.
Without reversing a decline in the latter, member governments' long-term ability to fund social welfare systems were at risk.
As a result, the IMF said it lowered its estimate for the euro area's potential growth rate - the rate above which the economy starts to use up spare capacity - by half a percentage point to 2.0 per cent this year and 2.1 per cent next.
"The recovery is in the works but...it's not yet in the bag," the IMF's European Department Director Mr Michael Deppler told a teleconference on the report.
As part of its annual review of the region, the IMF held consultations in May with senior representatives of the ECB and the Commission - including ECB chief Mr Jean-Claude Trichet. It presented preliminary findings to the European Union's Economic and Financial Committee later in May and the Eurogroup of 12 finance ministers in June.
The Fund then updated its assessments and released the conclusions today.