gdp increasing by 0. 7 % and 0. 5 % in the first and second quarters, respectively. the recovery in growth has so far been driven partly by buoyant external demand and partly by domestic demand. private consumption increased moderately but investment was subdued. although short - term indicators have become more mixed over the past couple of months, the underlying determinants of economic activity remain favourable, and growth is expected to continue in 2005. on the external side, euro area exports should continue to benefit from positive global demand conditions in 2005. i admit, we have seen some moderation in global growth rates following a period in which the world economy has experienced its strongest dynamism in many years. we view this moderation, however, as an orderly return to sustainable, and still robust, rates of growth. on the domestic side, investment has thus far been subdued, partly due to weak construction investment. looking ahead, investment should be supported by the global environment and the continuing very favourable financing conditions in the euro area. in addition, improved earnings and greater corporate efficiency gained through business restructuring should support investment. as regards consumption, we see scope for it to strengthen further, particularly once employment prospects have improved more visibly. as with any assessment of the future, this outlook is surrounded by some uncertainty. in particular, there are risks to growth prospects stemming from unfavourable developments in oil markets. in this respect, let me emphasise a number of characteristics of the recent rise in oil prices. first, it is evident that recent oil price developments differ somewhat from previous oil price shocks, as they have been partly driven by buoyant global demand, and not only by constraints on the supply side. second, oil prices, in real terms, have remained at a much lower level than in previous episodes. third, the oil - intensity of production is lower in the euro area than it was in the past. and finally, in percentage terms, the oil price increase has not been as high as in previous oil price shocks. despite this, however, oil price increases constitute a significant adverse shock to the euro area economy - through their direct impact on energy prices, their implications for global economic growth, and their adverse effect on the euro area ’ s terms of trade. if oil prices were to remain at close to usd 50 per barrel, or even increase further, they would dampen the strength of the recovery. with regard to inflation, oil price developments have had a powerful direct impact on the year

lucas papademos : presentation of the european central bank ’ s annual report for 2004 introductory statement by mr lucas papademos, vice - president of the european central bank, to the committee on economic and monetary affairs of the european parliament, brussels, 26 april 2005. * * * madam chairman, members of the committee on economic and monetary affairs, it is an honour for me to present to you today the ecb ’ s annual report 2004. the presentation of the annual report is an essential part of the ecb ’ s accountability vis - a - vis the european parliament. as you know, the ecb accords the utmost importance to the fulfilment of its accountability obligations, and i am looking forward to a fruitful dialogue with you. in my introductory statement, i will first briefly review economic and monetary developments over the past year and give our assessment of the economic outlook and the monetary policy stance. i will then focus on a number of policy issues examined in the annual report which i consider to be of particular importance. economic and monetary developments looking back to 2004, the ecb ’ s monetary policy operated in an environment of gradual economic recovery and subdued domestic inflationary pressures in the euro area. the recovery in economic activity, which had started in the second half of 2003, continued in 2004 at what was, overall, a moderate but uneven pace. the euro area economy grew strongly in the first half of the year, in particular as a result of robust global economic expansion. however, partly on account of rising oil prices, growth moderated in the second half of 2004. nevertheless, on a working day - adjusted basis, euro area real gdp grew by 1. 8 % in 2004, a markedly higher average annual rate than the 0. 5 % recorded in 2003. against this background of relatively modest economic growth, underlying domestic inflationary pressures remained contained throughout 2004 and early 2005. continued wage moderation played a key role in this respect. however, increases in administered prices and indirect taxes and renewed rises in oil prices, particularly in the second half of the year, had a sizeable impact on inflation. overall, annual hicp inflation was 2. 1 % in 2004, unchanged from the previous year. all in all, the governing council continued to take the view throughout 2004 and early 2005 that the outlook for price developments was consistent with the maintenance of price stability over the medium term. key ecb interest rates were therefore kept unchanged at historically low levels. across the entire maturity spectrum