–Adds Oil and Exchange Rate Assumptions Underlying Forecasts

PARIS (MNI) – Eurosystem staff have significantly raised their
midpoint forecast for 2010 Eurozone GDP growth, as expected, while
revising the 2011 GDP forecast upward slightly, ECB President
Jean-Claude Trichet announced Thursday.

Projections for HICP inflation both this year and next were revised
only slightly upward.

The sharp upward revision in the 2010 growth projection had been
widely expected, given the Eurozone’s unexpectedly strong 1.0% quarterly
GDP bounce in the second quarter. That figure, which Eurostat confirmed
today, was broad-based, with gains driven by investment, consumption,
trade and inventory changes.

The strong second quarter performance was due first and foremost to
Germany, the Eurozone’s largest economy, where GDP expanded at a
dizzying 2.2% q/q clip in the second quarter. However, that was partly
attributable to a once-off catch-up effect in construction. The
Bundesbank expects slowing global demand to dampen exports and overall
growth going forward, and that means slowing growth for the Eurozone as
a whole.

That explains why the 2011 GDP forecast did not benefit from the
same boost as the 2010 projection.

The new forecast puts 2010 GDP in a range of 1.4% to 1.8%, with a
growth midpoint of 1.6%. That compares with a range of +0.7% to +1.3%
and a midpoint of 1.0% in the June forecast. For 2011, the staff now
projects growth in a range of 0.5% to 2.3%, yielding a midpoint of 1.4%.
In June, the forecast for next year was in an extremely wide range of
+0.2% to +2.2%, with a midpoint of 1.2%.

Trichet said the revision in the 2010 GDP projection was “owing to
the stronger than expected rebound in economic growth in the second
quarter as well as better than expected developments over the summer
months.”

“For 2011 the range has also been revised upwards, reflecting
mainly carry-over effects from the projected stronger growth towards the
end of 2010,” he added.

Still, Trichet cautioned that “in the Governing Councils
assessment, the risks to this improved economic outlook are slightly
tilted to the downside, with uncertainty still prevailing.”

“On the one hand, global trade may continue to perform more
strongly than expected, thereby supporting euro area exports. On the
other hand, concerns remain relating to the emergence of renewed
tensions in financial markets and to some uncertainty about growth
prospects in other advanced economies and at the global level,” Trichet
said.

“In addition, downside risks relate to renewed increases in oil and
other commodity prices, and protectionist pressures, as well as the
possibility of a disorderly correction of global imbalances,” he
elaborated.

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%.
HICP is now expected at +1.6% this year, up marginally from the 1.5%
projected midpoint in June. The ECB staff put HICP in 2011 at a midpoint
of 1.7%, up from 1.1% in June.

Trichet said the upward revision was due largely to higher
commodity prices.

“Risks to the outlook for price developments are slightly tilted to
the upside,” he said.

“They relate, in particular, to the evolution of energy and non-oil
commodity prices. Furthermore, increases in indirect taxation and
administered prices may be greater than currently expected, owing to the
need for fiscal consolidation in the coming years.”

“At the same time, risks to domestic price and cost developments
are contained,” he said.

“Overall, we expect price stability to be maintained over the
medium term, thereby supporting the purchasing power of euro area
households. Inflation expectations remain firmly anchored in line with
our aim of keeping inflation rates below, but close to, 2% over the
medium term. The firm anchoring of inflation expectations remains of the
essence.”

The ECB forecasts are roughly in line with those of other major
institutions, with the exception of this year’s GDP growth outlook.

The latest European Commission forecasts, published in May, predict
that Eurozone GDP will expand by 1% this year and 1.5% next year. The
Commission projects the annual rate of HICP inflation at 1.5% this year
and 1.75% in 2011. The EU’s executive arm is scheduled to update its May
projections later this month.

The Organization for Economic Cooperation and Development is
projecting growth of +1.2% and +1.8% in 2010 and 2011, respectively. On
the inflation front, the OECD Sees Eurozone HICP at 1.4% this year, then
slowing to 1.0% in 2011. Those forecasts, also from May, are set to be
updated September 9.

In computing its forecasts, the ECB staff assumed a euro-dollar
exchange rate averaging $1.31 over the 2010-11 period. It also assumed
oil would average $78.80 a barrel this year and $84 in 2011.

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

New Projections June Projections
Range Midpoint Range Midpoint
2010 GDP +1.4% to +1.8% +1.6% +0.7% to +1.3% +1.0%
2011 GDP +0.5% to +2.3% +1.4% +0.2% to +2.2% +1.2%
2010 HICP +1.5% to +1.7% +1.6% +1.4% to +1.6% +1.5%
2011 HICP +1.2% to +2.2% +1.7% +1.0% to +2.2% +1.1%

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

[TOPICS: MT$$$$,M$X$$$,M$$EC$]