Germany
ECB Cuts Growth Forecast After Oil Price Surge, Person Says
June 1 (Bloomberg) -- The European Central Bank cut its growth forecasts for the 12 countries sharing the euro after the price of oil surged to a record this year, a person familiar with the matter said.
The central bank expects the economy to expand about 1.4 percent this year, less than a March 3 forecast of 1.6 percent, said the person, who declined to be identified. Inflation is estimated to reach 2 percent in 2005 and will slow to 1.5 percent in the next two years, the person said.
Oil prices around $50 a barrel and rising unemployment are undercutting growth in the region, damping business confidence and prompting politicians including Italian Prime Minister Silvio Berlusconi to call on the ECB to cut rates. The euro dropped to the lowest in eight months today after French voters rejected the European Union constitution on May 29.
``Leading indicators have fallen across the board,'' said Ian Stewart, chief European economist at Merrill Lynch & Co. in London. ``Rates are probably on hold for another year.''
The forecasts by the staff of the ECB and the 12 national central banks will be discussed by the ECB's 18 policy makers tomorrow. The ECB set the bank's benchmark interest rate at a six- decade low of 2 percent since June 2003 and all 40 economists surveyed by Bloomberg last week said they expect the bank to leave rates unchanged tomorrow.
The euro dropped to $1.2253 today, taking its loss since touching a record high of $1.3666 on Dec. 30 to 10 percent.
Calls for Rate Cut
The European Commission in Brussels lowered its forecast for second-quarter growth to 0.3 percent today, down from a 0.4 percent estimate on May 12. The Organization for Economic Cooperation and Development on May 24 called on the ECB to lower rates after cutting its 2005 euro-region growth forecast to 1.2 percent from 1.9 percent.
ECB President Jean-Claude Trichet said last month that lowering interest rates wasn't an option for the bank. ECB council member Klaus Liebscher reiterated that sentiment on May 25, saying a cut would hurt the bank's credibility and that the current rate is ``appropriate.''
Higher energy bills are weighing on consumer confidence and boosting costs at companies including Cologne-based Deutsche Lufthansa AG. Oil prices, as measured in Brent crude futures, climbed to a record $57.65 a barrel on April 4 and traded at $51.36 at 10:48 a.m. in London today. European business confidence dropped to a 21-month low in May and consumers were the most pessimistic in more than a year, the European Commission said yesterday.
Manufacturing Contraction
Manufacturing in the euro region contracted the most in almost two years in May, an index of purchasing managers by NTC Research for Reuters Plc showed today, darkening the outlook for expansion this year.
``Growth in the euro area has been modest,'' said Trichet in Montreal on May 30. ``There can be no doubt that the increasing cost of raw materials (with crude oil heading the list) has led to increasing uncertainty over economic prospects and that it continues to loom as a risk of far from secondary importance.''
Companies haven't picked up hiring across the euro region even after the world economy boomed last year. Electrolux AB, the world's largest maker of household appliances, plans to eliminate about 1,100 jobs in Europe and International Business Machines Corp., the world's biggest computer-services company, said this month it's cutting as many as 13,000 jobs, mainly in Europe.
Government Woes
Support for governments is eroding as the unemployment rate stays near a five year high. The euro-region's jobless rate stayed at 8.9 percent in April, the European Union's statistics office said today.
Jean-Pierre Raffarin resigned as French prime minister yesterday after France became the first EU founding member to reject the referendum and German Chancellor Gerhard Schroeder is seeking early elections after unemployment rose to the highest since World War II.
Politicians are calling on the ECB to do more to boost growth. Berlusconi called the bank's policies ``destructive'' and German Economy and Labor Ministry Wolfgang Clement said yesterday that the bank must ``consider stabilizing the economic situation, especially since monetary stability is not endangered.''
``The forecasts are now very realistic,'' said Joerg Kraemer, chief economist at HVB Group in Munich. ``The political pressure on the ECB is sure to rise.''
Investors have abandoned expectations the ECB will raise rates this year, with some expecting a rate cut, futures trading suggests. The implied rate on the December Euribor interest-rate futures contract was 2.08 percent at 11:02 a.m. in Frankfurt.
The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's launch in 1999. The Euribor three-month money market rate was 2.13 percent.
To contact the reporter on this story:
Brian Swint in Frankfurt at bswint@bloomberg.net.
Last Updated: June 1, 2005 05:59 EDT
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