European Central Bank: Press conference - introductory statement
Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank, and
Mr Lucas Papademos, Vice-President of the European Central Bank, Frankfurt, 2 September 2004.
* * *
Ladies and gentlemen, the Vice-President and I will now report on the outcome of today's meeting of
the Governing Council of the ECB, which was also attended by the President of the ECOFIN Council,
Mr Zalm, and Commissioner Almunia.
We noted that the information which has become available in recent months indicates that the
economic recovery in the euro area has maintained its momentum and should remain firm in the
coming quarters. We have also witnessed somewhat higher inflation rates, mainly due to
developments in oil prices. At present, our judgement is that although some upside risks to price
stability exist, the overall prospects remain in line with price stability over the medium term.
Accordingly, we have retained our monetary policy stance and left the key ECB interest rates
unchanged. The level of interest rates is very low by historical standards, both in nominal and in real
terms, lending support to economic activity. We will remain vigilant with regard to all developments
which could imply risks to price stability over the medium term.
I shall now explain our assessment in more detail, turning first to the economic analysis.
The latest data releases confirm that the economic recovery in the euro area is continuing. According
to Eurostat's flash estimate, real GDP grew by 0.5% quarter on quarter in the second quarter of this
year, having recorded a 0.6% increase in the first quarter. These growth rates are the strongest in the
euro area for some time. The latest indicators of output and demand remain consistent with ongoing
growth in real activity, increasingly supported by domestic demand, also in the third quarter of 2004.
Looking ahead, the conditions for a continuation of the recovery remain in place. Economic growth
outside the euro area continues to be robust overall, even if subject to temporary fluctuations, and
should continue to support euro area export growth. On the domestic side, investment should benefit
from the positive global environment and the very favourable financing conditions. Improvements in
corporate efficiency and higher profits are also supporting business investment. Moreover, private
consumption should continue its gradual recovery, broadly in line with growth in real disposable
income which, with the usual lag, should be further underpinned by an increase in employment growth
later on.
Against this background, we expect the economic recovery in the euro area to continue and to
become more broadly based over the coming quarters, leading to a somewhat stronger upswing in the
course of 2005. This is also reflected in the ECB staff projections, which will be published today. They
envisage euro area real GDP growth of between 1.6% and 2.2% on average in 2004, rising to
between 1.8% and 2.8% in 2005. These growth rates are close to estimates for long-run potential
growth and, for both years, they are slightly higher than was expected in the June Eurosystem staff
projections. Available forecasts from international organisations and other sources convey a broadly
similar picture.
Overall, the risks to these projections seem to be broadly balanced. On the upside, the ongoing
momentum of the recovery may again imply more positive developments for economic growth in the
coming quarters. On the downside, there are still concerns about continuing economic imbalances in
other parts of the world. These imbalances could affect the sustainability of the economic recovery.
Another downside risk to the growth projections relates to oil prices. If these were to remain higher
than currently expected by markets, this could dampen both foreign and domestic demand. In
assessing these risks, however, it should be taken into account that, when expressed in euro, the
recent rise in oil prices has been significantly smaller than in previous episodes when oil price
increases had a major impact on the world economy. In addition, in real terms, oil prices are
significantly below the peaks they have reached in the past. Moreover, when compared with the 1970s
and 1980s, the oil intensity of production in the euro area and elsewhere has fallen significantly.
Finally, it should be kept in mind that, in contrast to previous periods of oil price turmoil, this year's rise
in oil prices is not only due to supply-side factors, but is also driven by the strong global expansion. All
these factors put the downside risks to economic activity coming from oil prices into perspective.
However, recent oil price developments have had a visible direct impact on price developments in the
euro area. Eurostat's flash estimate for annual HICP inflation in August was 2.3%, unchanged from
July. On the basis of current market expectations for oil prices, it appears unlikely that annual inflation
rates will return to levels below 2% in the remainder of this year.
Looking ahead, however, there are no indications at present of stronger underlying inflationary
pressures building up domestically. Recent wage developments have been moderate, and this trend is
expected to continue for some time to come in view of the continued high level of unemployment in the
euro area. If this is the case, and provided that one-off shocks to prices from other sources such as
those seen in 2004 are not repeated, annual inflation rates should drop below 2% in 2005.
Against this background the ECB staff projections put average annual HICP inflation at between 2.1%
and 2.3% for 2004 and between 1.3% and 2.3% for 2005. The lower end of these ranges is slightly
higher than what was projected in June for both 2004 and 2005. The ECB staff projections for inflation
are broadly consistent with other recently released forecasts.
However, several upward risks to the projections for inflation exist. Concerns relate in particular to oil
price developments, which may continue to have a visible impact on inflation. Oil price rises also imply
the risk of second-round effects emerging in wage and price-setting, a risk which intensifies when the
economic upswing strengthens. A further upward risk relates to the future evolution of indirect taxes
and administered prices. Indeed, upside risks to inflation are also reflected in the continued elevated
levels of measures of long-term inflation expectations derived from financial market indicators. While
these indicators should always be interpreted with caution, their current level calls for particular
vigilance.
Turning to the monetary analysis, the annual rate of M3 growth has moderated significantly since the
summer of 2003. This moderation largely represents a normalisation of portfolio allocation behaviour
following the easing of the exceptional economic and financial uncertainty which prevailed between
2001 and early 2003.
Nonetheless, M3 growth remains resilient. It appears that the reversal of past portfolio shifts is
proceeding more slowly than would have been expected on the basis of historical regularities. This
may reflect an increased risk aversion of households and firms, given the stock market losses they
experienced between 2000 and the spring of 2003. In addition, the low level of interest rates continues
to support monetary expansion, especially of the most liquid assets included in the narrow aggregate
M1.
The low level of interest rates also seems to be fuelling the growth of loans to the private sector, which
has risen to a relatively robust rate over recent months. In this respect, the growth rate of mortgage
loans to households is rather high and is associated with fairly dynamic housing market developments
and real estate prices in several euro area countries.
There remains substantially more liquidity in the euro area than is needed to finance non-inflationary
growth. At present, it is not clear how this excess liquidity will be used in the future. If significant parts
of these liquid holdings were to be transformed into transaction balances, particularly at a time when
confidence and economic activity were strengthening, inflationary risks would rise. In addition, high
excess liquidity and strong credit growth could become a source for strong asset price increases.
To sum up, while the economic analysis indicates that prospects are consistent with price stability
being maintained over the medium term, a number of upside risks need to be carefully monitored.
Cross-checking with the monetary analysis also supports the case for strong vigilance with regard to
the materialisation of risks to price stability.
As regards fiscal policy, first data for 2004 indicate that most euro area countries are likely to miss the
original budgetary targets set in their updated stability programmes. In some cases, countries seem to
have based their programmes on overly optimistic assumptions for economic developments. In
addition, some countries have been implementing fewer consolidation measures than originally
planned. As a consequence, the aggregate fiscal balance for the euro area is not likely to improve in
2004. Progress in fiscal consolidation needs to be prioritised and should be part of a comprehensive
and growth-friendly reform agenda.
The Governing Council remains convinced that there was and there is no need for changes to the text
of the Treaty and of the Stability and Growth Pact. The Pact is an appropriate framework for dealing
with countries' fiscal developments on a level playing-field. At the same time, we consider that
improvements could be introduced in the implementation of the Pact.
In line with the Broad Economic Policy Guidelines, macroeconomic policies need to be oriented
towards growth and stability in the euro area. This also requires sustained efforts to increase the
flexibility of labour and product markets in the euro area. In this respect, several governments in the
euro area have taken courageous steps over recent months. It is important that the reform momentum
is maintained, taking advantage of the economic recovery. This will not only increase overall economic
efficiency and enhance longer-term growth prospects in the euro area, but will also strengthen the
basis for a sustained economic upswing in the euro area.
We are now at your disposal for questions.