–Updates With Underlying Assumptions on euro fx, oil, interest rates

FRANKFURT (MNI) – The European Central Bank’s staff cut its
Eurozone growth forecasts for this year and for 2013, ECB President
Mario Draghi said Thursday, adding that risks remained on the downside.

The forecast for inflation by contrast was revised up slightly for
this year and in 2013, as a rebound in energy prices put some upward
pressure on EMU inflation in August after three months of easing oil
prices that had dampened HICP inflation to its lowest level in 15

At his monthly press conference, Draghi said the staff projects GDP
growth in a range of -0.6% to -0.2% in 2012, giving a midpoint of -0.4%.
That is well below June’s midpoint of -0.1%.

“Economic growth in the euro area is expected to remain weak,” with
financial tensions and uncertainty weighing on confidence, Draghi said.

In the medium term, “we expect the euro area economy to recover
only very gradually,” Draghi said. The risks to the forecast are
“assessed to be on the downside.”

The growth forecast range for 2013 was -0.4% to +1.4% for a
midpoint of +0.5%. The ECB staff in June had projected next year’s
growth at 1.0%.

Eurozone GDP contracted 0.2% in the second quarter and was flat for
the first quarter of the year. Leading indicators have remained in
contraction territory in August, though some have shown marginal
improvement. The Eurozone manufacturing PMI rose to 45.1 from 44.0 in
July. Economic sentiment fell to a three-year low in August, according
to the European Commission.

The staff revisions make the ECB slightly less optimistic than
other Eurozone growth forecasts.

The Survey of Professional Forecasters in the ECB’s August Monthly
Bulletin showed a 0.3% contraction for the Eurozone this year and 0.6%
growth in 2013.

The OECD, in its latest forecast for G7 countries on Thursday, said
it expects the three major European economies — Germany, France, Italy
— to contract by 0.2% in 2012, with contractions of 0.8% in 3Q and 1.0%
in 4Q of this year. The OECD’s last full-Eurozone forecast from May
projected a 0.1% contraction this year and 0.9% growth in 2013.

“With the euro area crisis still the most important risk for the
global economy, further policy action is needed to instill more
confidence in the monetary union,” OECD chief economist Pier Carlo
Padoan said ahead of the ECB Governing Council meeting Thursday.

The International Monetary Fund sees the Eurozone as a whole
contracting 0.3% this year, then rebounding to +0.7% in 2013. The
European Commission’s last forecast in May matches the IMF for this year
but projects a larger rebound, to a growth rate of 1.0%, in 2013.

On HICP inflation, Draghi said the ECB staff now projects a range
of 2.4% to 2.6%, giving a midpoint of 2.5%, up from 2.4% in June.

Harmonized consumer prices for next year were seen in a 1.3% to
2.5% range, putting the midpoint at 1.9% from 1.6% in June.

EMU HICP accelerated to 2.6% in August after three straight months
at 2.4%. Preliminary estimates of German inflation in EU harmonized
terms also showed consumer prices rising to 2.2%, with the national CPI
up to 2.0% after holding below 2% for the previous three months.

Draghi noted the rise in energy costs was likely to keep inflation
above 2% throughout this year but should fall back below 2% over the
course of 2013. As a result, “underlying price pressures should remain

The Survey of Professional Forecasters still shows inflation of
2.3% this year, falling to 1.7% in 2013. The IMF in July warned of a
“sizeable risk” of negative inflation by early 2014, since it expected
consumer prices to fall “well below” 2% in 2013.

The ECB’s new forecasts assume 10-year government bond yields
averaging 4.0% in 2012 and 4.2% in 2013; short-term interest rates of
0.6% in 2012 and 0.3% in 2013; and a depreciation in the average
effective euro rate down of 6.3% in 2012 and another 2.1% in 2013.

Other underlying assumptions are a euro-dollar exchange rate of
$1.26 in 2012 and $1.23 in 2013, commodity prices dropping 8.3% in 2012
and 0.3% in 2013, and Brent crude oil averaging $111.70 in 2012 and
$107.30 in 2013.

The following table contains the ECB’s new forecasts, compared with
the ones issued in June.

September Projections June Projections
Range Midpoint Range Midpoint
2012 GDP -0.6% to -0.2% -0.4% -0.5% to +0.3% -0.1%
2013 GDP -0.4% to +1.4% +0.5% 0.0% to +2.0% +1.0%
2012 HICP +2.4% to +2.6% +2.5% +2.3% to +2.5% +2.4%
2013 HICP +1.3% to +2.5% +1.9% +1.0% to +2.2% +1.6%

–Frankfurt Newsroom, +49-69-720-142; ccermak@mni-news.com

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