13 December 2001, 08:58  OUTLOOK ECB to sharply cut growth projections, but may still be overoptimistic

PARIS (AFX) - The European Central Bank will sharply reduce its forecasts for 2001 and 2002 growth when it publishes its December monthly bulletin today, economists said. But the central bank still appears to be relatively optimistic about the outlook for next year and its growth forecasts are likely to be above those of most private sector economists, they said. The forecasts are compiled by ECB and national central bank staff and provide an input to the ECB governing council's assessment of risks to price stability, but they are not formally endorsed by the council. The forecasts take the form of projections on the basis of unchanged interest and exchange rates. The last projections were published in the June monthly bulletin, but the world has changed since then, with all forecasters sharply cutting their growth forecasts in the wake of the Sept 11 terrorist attacks on the US. "The downward revision is inevitable and will be concentrated in the projections for 2002 for both inflation and GDP growth," said Alberto Baltanas Nunez of BSCH. The ECB is likely to cut its growth forecasts for both 2001 and 2002 to around 1.5 pct, economists said. In June it was looking for 2001 growth of 2.2-2.8 pct and 2002 growth of 2.1-3.1 pct. The projections are published in the form of broad ranges, but economists tend to focus on the mid-point of the range as the best indication of the ECB's thinking. Nunez said the forecast range for 2002 could be particularly wide because of the high level of uncertainty about the economic outlook. Michael Schubert of Commerzbank said the growth forecast for next year could be a range of 0.9-1.9 pct, while Dresdner Kleinwort Wasserstein economist Rainer Guntermann puts it at 1.25-2.25 pct. Others said the mid-point of the range is likely to be between 1.3 and 1.5 pct. The range for 2001 is likely to be narrower. Schubert said the ECB could publish a 2001 growth projection of 1.3-1.7 pct. This will therefore fall well short of the 2.1-3.1 pct forecast published in June and there may therefore be some scepticism about the central bank's projections in general, economists said. "Despite forecast ranges being wide-open and the low-profile definition of 'projections', the ECB managed to badly miss 2001 GDP growth," said Lorenzo Codogno of Bank of America. The ECB has been relatively optimistic about growth throughout the year, for a long time taking the view that the euro zone would be able to resist the US slowdown and achieve growth of 2.0-2.5 pct, its own estimate for potential growth in the euro area. It finally acknowledged that this would not be attainable on Aug 31 when it cut interest rates for only the second time this year. It has since made two further rate cuts. The ECB may also be too optimistic about 2002 growth, economists said. ECB officials continue to express confidence that the economy will recover from the impact of the Sept 11 attacks in the first half of next year, and ECB president Wim Duisenberg last week said that although growth for the year as a whole will be low, the annualised growth rate will be close to the 2.0-2.5 pct potential rate at the end of the year. Full year growth will be above that of the US, he said. The European Commission recently cut its forecast for 2002 growth to 1.3 pct from 2.9 pct, but the ECB is understood to regard the Commission's forecasts as slightly pessimistic. The OECD is forecasting euro zone growth of 1.4 pct in 2002 while the IMF is predicting a 1.6 pct rate. However, many private sector economists are forecasting much lower figures than those put forward by the international institutions and the kind of projection the ECB is likely to publish. "Recent ECB statements suggest its internal outlook is still on the strong side. GDP projections are likely to be centred at 1.5 pct, that is well above our expected 0.6 pct," said Codogno. Nunez said BSCH is forecasting GDP growth of 1.0 pct next year. The ECB's inflation projections for 2002 are also likely to be revised down, although less sharply than the growth forecasts, said Marie-Pierre Ripert of Caisse des Depots. ECB president Wim Duisenberg has already said that the central bank expects inflation to fall "safely" below its 2 pct price stability ceiling early next year and then stay there "for a considerable time to come" and the inflation projection will reflect this. Philippe Weber of CPR said the ECB may put the projection for annual average inflation at 1.5-2.0 pct, while Guntermann said it could be 1.0-2.0 pct. In June the ECB forecast 2002 inflation of 1.2-2.4 pct. For 2001 year-on-year data have already been published up to November and these suggest that annual average inflation will be within the 2.3-2.7 pct range which the ECB forecast in June. The ECB projections will also include forecasts for 2003 for the first time, and the growth figure will be well above those for 2001 and 2002, economists said. "The first growth projections for 2003 are likely to paint a markedly brighter picture than the ones for 2002," said Claudia Henke of Dresdner Bank. Economists expect growth to be back above its potential rate in 2003 and this is likely to be reflected in the ECB's projections, although it may err on the side of caution. "After two years of sub-par growth, we believe that Europe should be back to above trend growth in 2003," said Eric Chaney of Morgan Stanley, who expects 2003 growth of 3.2 pct after only 0.9 pct in 2002. Schubert of Commerzbank said the ECB could settle on a forecast range of 2.3-3.3 pct for 2003, while Guntermann of Dresdner Kleinwort Wasserstein said it might predict 2003 growth of 1.9-3.1 pct. The projections are unlikely to have major implications for ECB interest rates, since Duisenberg last week said that the central bank's current monetary policy stance already takes account of its expectations for growth and inflation next year, economists said. Rates are "appropriate for the current outlook that we have in a forward-looking perspective, and that includes the perspective as we see it for next year", he said.

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