EU sees H2 growth picking up, limited turmoil impact

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BRUSSELS, Oct 4 (Reuters) The impact of the global credit crunch on the euro zone economy is likely to be moderate, the European Commission said on Thursday, forecasting a pick-up in growth in the second half of 2007 after a slower second quarter.

In a quarterly report on the economy of the 13 countries using the euro, the European Union executive noted business and consumer confidence surveys weakened in the past months, suggesting the economic cycle had peaked.

But it said they remained well above long-term averages.

''Looking ahead, euro-area fundamentals continue to be strong, business and consumer confidence has softened but remain high and would support a pick-up in growth during the second half of the year,'' the report said.

It reiterated the latest Commission forecast for euro zone economic growth of 2.5 percent this year.

That forecast was revised down in September from a previous forecast of 2.6 percent because of the expected impact of the global credit crunch.

''The evolution and duration of the current crisis is difficult to predict and will depend on the eventual scale and distribution of losses as they gradually emerge as well as on their impact on confidence,'' the report said.

The Commission said strong earnings in recent years gave euro zone banks a significant financial buffer to weather the financial market turbulence while wage moderation boosted the profitability of non-financial corporations.

Consumer spending should be underpinned by improvements in the labour market while the economy as a whole appears to have become more resilient to shocks.

''Overall, tighter credit conditions can be expected to slow economic growth somewhat next year, but the impact is expected to be moderate,'' the report said.

The Commission said that according to its simulation, if market interest rates are 0.5 percentage point higher in the euro zone and the United States as a result of the market turbulence euro zone growth would slow by 0.3 of a percentage point in 2008 compared to the central scenario.

The Commission forecast in May that 2008 growth would be 2.5 percent in the euro zone.

The simulation in Thursday's report showed that the impact of the high-risk premia on the market would reduce growth by 0.25 percentage points in 2009 and 0.15 point in 2010.

REUTERS SR SSC1524

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