–Adds Trichet Comments On Inflation, Growth and Forecast Assumptions

PARIS (MNI) – Eurosystem staff have raised their forecast for 2010
Eurozone GDP growth slightly upward while leaving it essentially
unchanged for 2011, ECB President Jean-Claude Trichet announced
Thursday.

The staff also edged up its 2011 HICP inflation forecast, while
leaving the 2010 forecast unchanged.

An upward revision to the 2010 growth projection had been widely
expected, given the Eurozone’s unexpectedly strong 1.0% quarterly GDP
bounce in the second quarter and the fact that the deceleration of
growth in the third quarter was not as sharp as had been feared.

Eurostat confirmed early today that Eurozone GDP grew by 0.4% in
the third quarter, confirming its earlier flash estimate. The slowdown
was due largely to inventory changes and stagnant investment.

The new ECB forecast puts 2010 GDP in a range of 1.6% to 1.8%, with
a growth midpoint of 1.7%. That compares with a range of +1.4% to +1.8%
and a midpoint of 1.6% in the September forecast. For 2011, the staff
now projects growth in a range of 0.7% to 2.1%, yielding a midpoint of
1.4%. In September, the forecast for next year was also in an extremely
wide range of +0.5% to +2.3%, yielding the same midpoint of 1.4%.

The ECB staff also released its first GDP forecast for 2012,
putting GDP in a wide range of +0.6% to +2.8%, for a midoint of +1.7%.

Trichet said the new growth forecasts reflect recent indicators
showing “the positive underlying momentum of the economic recovery in
the euro area remains in place.” He said euro area exporters should
continue to benefit from the recovery of global economic activity, while
private domestic demand should increasingly contribute to growth,
“supported by the accommodative monetary policy stance and the measures
adopted to restore the functioning of the financial system.”

However, risks to growth are “tilted to the downside with
uncertainty remaining elevated,” the ECB chief cautioned.

While exports may gain from global trade growth and business
confidence in the euro area is “relatively high,” there are risky
tensions ini financial market which could spill over into the real
economy of the Eurozone, he said. “Further downside risks relate to
renewed increases in oil and other commodity prices, protectionist
pressures, and the possibility of a disorderly correction of global
imbalances,” he added.

On the price front, the new forecasts continue to show inflation
well below the ECB’s price stability threshold of close to but below 2%.
The HICP projection for 2010 is unrevised from September in a range of
1.5% to 1.7%, yielding a midpoint of 1.6%. The ECB staff ticked up its
HICP expectation for 2011, with a range of 1.3% to 2.3%, giving a
midpoint of 1.8%, up from 1.7% in September.

In its first estimate for 2012, the ECB staff put HICP between 0.7%
and 2.3%, a very wide range with a midpoint of 1.5%.

Trichet said the forecasts for HICP were consistent with the
expectation that “in the period ahead, inflation rates should remain
moderate. Inflation expectations over the medium to longer term continue
to be firmly anchored in line with the Governing Councils aim of keeping
inflation rates below, but close to, 2% over the medium term.”

Trichet also said that inflation risks are “broadly balanced.”
Upside risks are in commodity prices, including energy, as well as
potentially greater-than expected increases in indirect taxes and
administrative prices as EMU governments pursue budget cutting policies.
Nonetheless, “risks to domestic price and cost developments are still
expected to be contained,” Trichet said.

The ECB forecasts assume an average euro exchange rate of $1.34 in
2010 and $1.39 in 2011. They assume a 5.9% average depreciation in the
euro’s effective exchange rate this year, followed by a 0.8% rise in
2011. The forecasts also assume an average oil price of $79.50 this year
and $88.60 in 2011.

Short-term market interest rates are expected to average 0.8% this
year, then rise to 1.4% on average in 2011.

The ECB forecasts are very close to those of other major
institutions.

The latest European Commission forecasts, published Monday, predict
that Eurozone GDP will expand by 1.7% this year and 1.5% in 2011. The
Commission projects the annual rate of HICP inflation at 1.5% this year,
rising to 1.8% in 2011.

In its most recent forecasts, published on November 18, the
Organization for Economic Cooperation and Development projected Eurozone
growth of +1.7% both in 2010 and 2011. On the inflation front, the OECD
sees Eurozone HICP at 1.5% this year, slowing to 1.3% in 2011.

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

New Projections June Projections
Range Midpoint Range Midpoint
2010 GDP +1.6% to +1.8% +1.7% +1.4% to +1.8% +1.6%
2011 GDP +0.7% to +2.1% +1.4% +0.5% to +2.3% +1.4%
2012 GDP +0.6% to +2.8% +1.7% First Forecast
2010 HICP +1.5% to +1.7% +1.6% +1.5% to +1.7% +1.6%
2011 HICP +1.3% to +2.3% +1.8% +1.2% to +2.2% +1.7%
2012 HICP +0.7% to +2.3% +1.5% First Forecast

–Frankfurt newsroom: +49-69-720142; frankfurt@marketnews.com

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