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, Brussels, 7 October 2004.
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Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to the press
conference here in Brussels. Today's meeting is the tenth time that the Governing Council has met
outside Frankfurt, and I would like to thank Governor Quaden for his invitation. Let me also express
our gratitude to the staff of the Nationale Bank van België/Banque Nationale de Belgique for their kind
hospitality and perfect organisation of today's meeting.
Let me now report on the outcome of today's meeting. As regards economic growth, while some
uncertainty has recently arisen concerning the expected strengthening of activity, the economic
recovery in the euro area is ongoing. Looking at price developments, high oil prices have had a visible
direct impact on inflation rates this year. However, the risk of second-round effects still seems to be
contained, and the overall outlook remains consistent with price stability over the medium term.
Accordingly, we have left the key ECB interest rates unchanged. This means that the level of interest
rates continues to be very low by historical standards, in both nominal and real terms. Strong vigilance
is warranted 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 information available to date indicates that the economic recovery in the euro area is continuing.
In particular, survey indicators up to September point to ongoing growth in industrial production and
the services sector. Moreover, the gradual recovery in consumer confidence is proceeding, and there
are some tentative signs of an improvement in the prospects for employment, although available
indicators for household spending do not yet point to an immediate strengthening of consumption
growth.
All in all, the growth momentum seen in the euro area in the first half of 2004 should be broadly
maintained in the coming quarters, in line with available forecasts from international organisations. On
the external side, euro area exports should continue to benefit from favourable global demand
conditions, not least from trade with the new EU Member States, where import demand has been
strengthening. On the domestic side, investment should benefit from the positive global environment
and the very favourable financing conditions in the euro area. As companies restructure,
improvements in corporate efficiency and higher profits are also supporting business investment.
Moreover, there is scope for a recovery in euro area private consumption, in line with growth in real
disposable income.
Any central scenario for future developments is surrounded by a good deal of uncertainty, which at
present is particularly related to oil prices. If oil prices were to remain high, or even increase further, it
could dampen the strength of the recovery, both inside and outside the euro area, even though the oil
intensity of production has fallen significantly since the 1970s and 1980s. All in all, while the burden
resulting from higher oil prices cannot be avoided, its medium-term impact should be of a more limited
magnitude than in the past. Obviously, for this outcome to materialise, all parties concerned must live
up to their responsibilities.
Turning to consumer prices, the oil market developments have had a direct impact on the euro area
HICP. Following an annual rate of inflation of 1.7% in the first quarter of 2004, inflation reached 2.3%
in the second quarter and remained at that level in July and August. According to Eurostat's flash
estimate, annual HICP inflation seems to have fallen slightly in September, to 2.2%. Higher energy
prices may have been more than compensated by lower food prices, partly due to base effects
resulting from last year's strong increases in this sub-category. Still, 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.
Nevertheless, looking further ahead, the available information does not indicate that stronger
underlying inflationary pressures are building up domestically. Recent wage developments have
remained moderate, and this trend should continue. On the basis of this assumption, and provided
that there are no further significant shocks to prices, annual inflation rates should drop below 2% in
2005.
Several upward risks to the outlook for price stability continue to exist. Concerns again relate to oil
price developments, in particular to the extent that second-round effects stemming from wage and
price-setting behaviour materialise. It is therefore of the utmost importance to avoid inappropriate
reactions, as observed in past episodes of strong oil price increases. A further upward risk relates to
the future development of indirect taxes and administered prices. These upside risks call for ongoing
vigilance, which is a necessary condition for keeping medium to long-term inflation expectations in line
with our definition of price stability.
As regards the monetary analysis, M3 growth remains resilient. The downward trend in annual M3
growth from mid-2003 appears to have halted over the summer months, and the shorter-term
dynamics of M3 have strengthened. This reflects the fact that the historically low level of interest rates
in the euro area continues to support monetary expansion, especially of the most liquid assets
included in the narrow aggregate M1.
The low level of interest rates also fuels the growth of MFI credit. The annual growth rate of loans to
the private sector remains robust, largely driven by the dynamism of mortgage loans. These are also
supported by strong house price increases 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, which is mainly the result of past portfolio
shifts, 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 of substantial asset price increases.
To sum up, annual inflation rates should fall below 2% in 2005, but a number of medium-term upside
risks to price stability 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.
Let me also address the current evidence on fiscal developments, where the latest budgetary
notifications are a source of concern. While some countries will maintain a sound budgetary position, a
significant number of euro area countries are expected to record deficits near to or above 3%. The
aggregate euro area fiscal deficit-to-GDP ratio is expected to increase somewhat, as is the
debt-toGDP ratio. In the coming years, important challenges for the consolidation of public finances will have
to be faced. Member States need to renew their consolidation efforts and should not rely on one-off
measures, so as to comply with their commitments under the Stability and Growth Pact and to foster
confidence. They must also set the right priorities in public finances, towards structural reform,
innovation and competitiveness. This would very much support the Lisbon agenda and thereby
promote economic growth, foster job creation and reduce unemployment.
Concerning the European fiscal framework, the Governing Council is convinced that substantial
improvements in the implementation of the Stability and Growth Pact are possible and would be
beneficial, while we would warn against a change to the text of the Treaty or the Regulations which
form the basis of the Pact. We consider the Pact as key to ensuring macroeconomic stability on a
sustainable basis. It is a framework which is necessary to preserve sound fiscal policies in the euro
area, for which strict surveillance and effective peer pressure on national budget policies are
indispensable.
It is of vital importance to the credibility of the budgetary surveillance that the reliable compilation and
timely reporting of government finance statistics is ensured. The European accounting rules must be
fully respected when recording all types of expenditure and revenue. This should be done in a manner
that is consistent and stable over time and homogeneous across countries. The procedures must not
be vulnerable to political and electoral cycles, as stated by the ECOFIN Council. Countries should
consider the quality and integrity of their statistics as a priority matter.
Finally, let me report on the detailed discussion we had today on employment and unemployment
developments in the euro area. Two observations stand out when we look at the period of relatively
slow real GDP expansion since early 2001. First, after an initial rise, the euro area unemployment rate
has remained broadly unchanged since early 2003. And second, there seems to have been a
relatively limited negative impact on employment growth over the past few years. The following
factors might help to explain this pattern. While the period of slow growth has been relatively long from
a historical perspective, the cyclical amplitudes have been smaller and have not therefore triggered
very sharp reactions of employment and unemployment. In addition, wage developments have been
more favourable than in previous episodes, and firms may have - to a greater extent than previously -
adjusted labour input downwards in term of hours, rather than in terms of employees. This in turn
might indicate that firms have gained an element of flexibility to adjust costs.
Looking forward, from a cyclical point of view, employment should recover and unemployment could
start falling in the course of next year if overall demand develops as expected. This should support
economic growth through an increase in labour income and a positive impact on consumer
confidence, and thus on consumption. However, structural problems remain large. This is highlighted,
for example, by the fact that over 40% of all unemployed people in the euro area have been without a
job for more than a year. In order to decisively overcome the obstacles towards more employment
growth and to reduce the trend or structural level of unemployment, further comprehensive labour
market reforms are of the essence.