LONDON (AFX) - Heavyweight US broker Merrill Lynch has lowered its euro zone GDP estimates for 2002 and 2003, partly as a result of the single currency's strength. In addition, Merrill Lynch economist Sharda Dean reckons that if the euro rises above parity against the dollar and stays there, then CPI should fall to around 1 pct by December, likely pushing back the first ECB hike to 2003. The euro's appreciation is already starting to have some effect on ECB thinking, as evidenced by recent comments from ECB members. As a result, Dean has softened her "perky" GDP profile for the euro zone. Another element behind her GDP revisions is that the dataflow has been a little weaker than anticipated, with industrial production and consumption disappointing in Germany. She has moved from an "above-consensus" to a "below-consensus" view for 2002 GDP, though she remains "very optimistic" about 2003. Euro zone GDP growth in 2002 is expected to be 1.2 pct against a previous estimate of 1.5, while 2003 should pick up to 3.4 pct against a previous forecast of 3.7 pct. German growth this year is predicted to be only 0.8 pct against a previous forecast of 1.1 pct, but this should pick up to 3.1 pct in 2003, lower than the previous forecast of 3.7 pct. In France, Dean predicts growth this year of 1.6 pct and 3.5 pct next, while Italy should grow 1.2 pct this year and 3.0 pct next. Dean said she was reluctant to cut her inflation forecasts, even though the preliminary estimates of June inflation were better-than-expected. The "flash" estimate of June inflation was 1.7 pct, the first time the figure has dropped below 2 pct since May 2000. She expects inflation of 2 pct both this year and next. "After months of stronger than expected inflation we are reluctant to cut the inflation forecast just yet, and would prefer to see whether our benign expectations of falling core inflation rates comes true before we tinker further with the forecasts," she said. Dean said she expects the euro to correct towards year-end to 0.97, which should mean CPI at around 1.5 pct in December. "This supports our long held expectation of the first rise in ECB rates in October," she said. "By then the recovery should be more robust and fears about 2003 inflation would prompt a rate hike." Unless the euro falls back over the next few months, the ECB will have no need to raise rates before 2003, she added.