jean - claude trichet : european economy - current state and prospects keynote address by mr jean - claude trichet, president of the european central bank, at the annual dinner 2004 of financial services ireland ( fsi ), dublin, 23 september 2004. * * * i am very honoured to have been invited here today. i would like to thank you, mr chairman, and the executive board of financial services ireland for your invitation, and for giving me this opportunity to share my views on the state of the european economy and the prospects for the future. i will like first to discuss the current economic and financial situation in the euro area and prospects for the future, and then i will focus on some of the conditions which need to be in place to ensure sustainable growth, including the role of fiscal policy. current economic situation and future prospects let me start by describing the current economic and financial situation. the latest data releases confirm that the economic recovery in the euro area is continuing. 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. moreover, the latest indicators of output and demand remain consistent with ongoing growth in real activity. looking ahead, the conditions for a continuation and broadening of the recovery remain in place. economic growth outside the euro area continues to be robust, 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, the economic recovery in the euro area is expected to continue and to become more broadly based over the coming quarters, leading to a somewhat stronger upswing in the course of 2005. i should note that this scenario of an ongoing and further progressing economic recovery is, as always, subject to some risks - in both directions. 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.

inflation. food price inflation and underlying price pressures across the economy have strengthened and will persist for some time. amid exceptional uncertainty, eurosystem staff have significantly revised up their inflation projections. they now see average inflation reaching 8. 4 per cent in 2022 before decreasing to 6. 3 per cent in 2023, with inflation expected to decline markedly over the course of the year. inflation is then projected to average 3. 4 per cent in 2024 and 2. 3 per cent in 1 / 4 bis - central bankers'speeches 2025. inflation excluding energy and food is projected to be 3. 9 per cent on average in 2022 and to rise to 4. 2 per cent in 2023, before falling to 2. 8 per cent in 2024 and 2. 4 per cent in 2025. the euro area economy may contract in the current quarter and the next quarter, owing to the energy crisis, high uncertainty, weakening global economic activity and tighter financing conditions. according to the latest eurosystem staff projections, a recession would be relatively short - lived and shallow. growth is nonetheless expected to be subdued next year and has been revised down significantly compared with the previous projections. beyond the near term, growth is projected to recover as the current headwinds fade. overall, the eurosystem staff projections now see the economy growing by 3. 4 per cent in 2022, 0. 5 per cent in 2023, 1. 9 per cent in 2024 and 1. 8 per cent in 2025. the decisions taken today are set out in a press release available on our website. i will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions. economic activity economic growth in the euro area slowed to 0. 3 per cent in the third quarter of the year. high inflation and tighter financing conditions are dampening spending and production by reducing real household incomes and pushing up costs for firms. the world economy is also slowing, in a context of continued geopolitical uncertainty, especially owing to russia's unjustified war against ukraine and its people, and tighter financing conditions worldwide. the past deterioration in the terms of trade, reflecting the faster rise in import prices than in export prices, continues to weigh on purchasing power in the euro area. on the positive side, employment increased by 0. 3 per cent in the third quarter, and unemployment hit a new historical low of 6. 5 per cent in october.