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BRUSSELS, Aug 20 (AFP): The eurozone economy is booming, but the good times may prove to be shortlived, with a potent combination of factors due to bite into growth in the coming months, economists warned.
Usually the laggard of the world's major economies, the eurozone outpaced Britain, Japan and United States in the second quarter, when the bloc's economy expanded 0.9 per cent over one quarter and 2.4 per cent over one year, the European Union's Eurostat data agency said last week.
The eurozone economy had not grown as fast since the peak of the dot.com boom in 2000, although many economists doubt the bloc can keep up the pace for more than a few quarters.
"Of course, we do not expect the structurally challenged eurozone to stay at the top of the ... growth league," said Morgan Stanley economist Holger Schmieding.
"Any external shock, be it a new spike in oil prices or an unexpectedly sharp slowdown in US consumption growth, would hit the eurozone severely," he warned.
Global Insight economist Howard Archer said there was no shortage of factors to dampen growth, which he estimated already peaked in the second quarter.
"A stronger euro, slowing global growth, very high oil prices, higher interest rates and tighter fiscal policy in several countries (notably Germany and Italy) threaten to exact an increasing toll on eurozone growth going forward," he said.
The US economy is widely expected to slow in the coming quarters, and could even slump into recession according to some economists.
A slowdown in the world's biggest economy would likely dampen US demand for eurozone exports, although economists disagree on how long it would take a US downturn to weigh on the eurozone economy.
But a steady stream of weak US economic figures will also likely push up the value of the euro, making exports from the European currency club more expensive on international markets.
Meanwhile, the European Central Bank, ever vigilant to keep inflation under control, continues to fret over oil prices and has signalled that it will keep cranking interest rates higher, which will make consumers and business think twice before rushing out to borrow money.
Even though inflation data for July were lower than expected at 2.4 per cent, strong growth is likely to boost the ECB's confidence that it can keep raising interest rates without triggering a full-out economic slump.
"Stronger GDP (gross domestic product) data make it even more likely than before that the ECB will go beyond the widely anticipated 0.25 percentage point hike in October and raise rates to 3.5 per cent by December," Morgan Stanley's Schmieding said.
As if that prospect of higher interest rates was not enough to dent still fragile consumer confidence, Germany and Italy are both planning painful measures to cut public spending in order to keep their deficits in line with EU rules.
Berlin is planning on lifting value added tax next year by three percentage points to 19 per cent, which could boost inflation in the eurozone and raise eyebrows at the ECB.
Although German consumers have been rushing to buy goods ahead of the VAT markup, the spending spree is likely to run out afterwards and the current improvement in German confidence could prove short-lived.
Meanwhile, Rome is struggling to cut its deficit and has announced spending cuts that are likely to weigh on already weak consumer confidence in Italy, which has been one of the eurozone's worse economic performers in recent years.
With such clouds on the horizon, most private economists expect the eurozone growth to fall to 1.8 next year after reaching 2.2 per cent this year, according to an ECB survey earlier this month.
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