ECONOMIC OUTLOOK: COMMISSION LOWERS 2001 GROWTH FORECASTS.

External context.However, the large reduction in interest rates by the Federal Reserve and the announcement of tax cuts by the US government should help growth to recover. Growth is expected to resume in the second half of 2001 and next year the US economy is expected to be, again, on a 3% growth path. The US growth engine is spluttering and the Japanese economy remains unable to take off decisively, the expansion of world GDP is forecast at only 3.3% this year after an exceptional 4.8% in 2000. Also world trade is expected to fall back from a growth rate of 12.4% last year to 7.6% in 2001. The impact on the EU is forecast as limited providing that the transmission mechanism is confined to the trade channel. EU exports to the US represent about 3% of EU GDP. It is estimated that the direct impact of slower US import growth would shave 0.25% off EU growth.Fairly upbeat but adopting a cautious stance, the Commission notes that tThe relatively benign outlook for the EU is not assured. Downside risks relate to: the US economy, which may take longer to overcome the present downturn in activity because consumers reassess their financial position; the transmission mechanism, which may involve not only trade effects but also exchange rate and share price volatility against the background of the large US current account deficit and low savings rate; domestic demand growth in the EU, supposed to counter the US slowdown. But if negative confidence and wealth effects develop or if inflation remains higher than expected, domestic demand may be adversely affected." On the positive side, economic fundamentals remain good. More competition and deregulation have made labour and product markets operate more flexibly. The EU is in a better position to absorb the externally induced slowdown.Growth prospects.The EU economy will not be able to escape some impact from the US-led slowing of world demand. This should be mainly felt in the first half of 2001 followed by an acceleration continuing into next year. The fall in GDP growth can be largely ascribed to external trade. Domestic demand in the EU is seen as hardly decelerating in 2001 compared to 2000, while it remains at previous year's level in the Euro zone. Furthermore, it is forecast to accelerate slightly in 2002.Household consumption expenditure is seen rising at a steady rate of 2.75% throughout the forecast period. It was negatively affected by higher import prices in 2000, but it should be...