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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: BubbaFred who wrote (14127)	10/27/2004 8:38:42 AM
From: mishedlo	Read Replies (5) \| Respond to of 116555

FOCUS High oil prices will force ECB to lower 2005 growth forecast Wednesday, October 27, 2004 11:29:41 AM afxpress.com ---- by Steve Whitehouse ---- PARIS (AFX) - The European Central Bank is likely to follow the EU Commission's lead and revise down its 2005 growth forecast in response to surging oil prices when it issues updated economic projections next month, economists said ECB president Jean-Claude Trichet could even signal such a shift at next week's monetary policy news conference, they said "For the 2005 growth outlook, the ECB obviously has changed its assessment. It no longer writes of a broadening of the upswing in 2005 and certainly no longer assumes stronger growth. That should indicate a revision of the growth projection," said Thomas Hueck of HVB "The acknowledgement of the downside risks is unavoidable," said GianLuigi Mandruzzato of Banca Intesa The European Commission yesterday trimmed its 2005 growth forecast to 2.0 pct from 2.3 pct as it incorporated the effects of surging oil prices. The commission's forecasts are based on an oil price of 50 usd per barrel in the fourth quarter, 45.1 usd next year and 40.1 usd in 2006 In September the ECB put the mid-point of its 2005 forecast range at 2.3 pct, basing this on an assumption that oil prices would average 36.8 usd per barrel in 2005 But oil prices have risen further since then. Brent crude futures were at 42.45 usd when the ECB forecasts were released, but now stand at 51.60 usd "If the oil price is still around 50 usd when the ECB does its next forecasting round in December, we would expect to see the 2005 growth forecast reduced," said Jonathan Hoffman of Royal Bank of Scotland Economists already detect subtle changes in tone in the statements of ECB governing council members Bank of Greece governor Nicholas Garganas last week told AFX News that 2005 growth is likely to be "nearer the lower part of the range than the upper part". The ECB's forecast range for 2005 is 1.8-2.8 pct Bank of Portugal governor Vitor Constancio said the ECB is not changing its 2005 forecast for the moment, but said he could not anticipate what the central bank will do when it reviews the forecasts in December And Trichet clearly softened his previously hawkish stance at the last ECB news conference on Oct 7, dropping the ECB's forecast of a somewhat stronger upswing in the course of 2005 and focusing more on risks from oil prices "The ECB changed its tune at the Oct 7 meeting. The tone was distinctly softer than at the September meeting," said Hoffman But even if it is becoming less confident about the potential for an acceleration in growth, the ECB is likely to insist that the economy is continuing to recover, economists said Trichet told the European Parliament on Monday that the ECB expects growth to maintain its recent trend in the coming quarters, although he acknowledged that oil prices could dampen the pace of the recovery if they stay at current levels or increase further Euro zone GDP has been growing at between 0.4 pct and 0.7 pct per quarter since mid-2003 "The ECB might adjust its growth figures somewhat, but it will not change the broad picture of modest, but steady economic recovery in the euro area," said Claudia Broyer of Dresdner Bank Alberto Baltanas Nunez of Grupo Santander said he has revised down his 2005 growth forecast to 2.0 pct from 2.3 pct and the ECB may do the same when it publishes its new forecasts But other economists said even a 2.0 pct growth forecast may be too optimistic "In its September projection, the bank assumed, as we did, that the euro area would be able to achieve 2.3 pct growth in 2005... we have meanwhile lowered our 2005 growth forecast by half a percentage point, since we are now less optimistic about oil prices," said Michael Schubert of Commerzbank And Ian Harwood of Dresdner Kleinwort Wasserstein said growth could even slow to 1.5 pct next year from 1.8 pct in 2004 As well as the direct impact of the oil price rise, the outlook for euro zone growth is also being adversely affected by signs of a slowing in the pace of global growth This will reduce demand for euro zone exports, which will also be further hit by the euro's renewed rise against the dollar German Chancellor Gerhard Schroeder yesterday described the euro's recent appreciation as "worrying". And while the growth stimulus from exports now seems to be fading, there is no sign of the pick-up in domestic demand which the ECB hopes will keep the recovery on track "They should factor in that domestic demand in Europe is weak. French retailers have to scale back their profit expectations and in Germany the recently announced job cuts will dampen consumer sentiment and burden the outlook for private consumption," said Hueck "The negative impact of the recent spike in oil prices has not yet been recorded in disposable income and consumption. Therefore further weakness should be expected over the coming months," said Lorenzo Codogno of Bank of America