Prospects for recovery in eurozone economy improve

PROSPECTS for a gradual recovery later this year in the eurozone economy have improved but risks remain, European Central Bank president Wim Duisenberg said yesterday.

"The chances for this phase of low economic growth gradually coming to an end have now increased," Duisenberg said in remarks that were relatively upbeat given recent figures showing the eurozone economy stagnated in the first quarter.

"Indeed, although there are still some downside risks to this scenario and ongoing balance sheet adjustments make a steep and swift rise in economic activity unlikely, the ECB expects a gradual recovery to occur in the course of this year and next," Duisenberg told the Zurich Economics Club.

Meanwhile, ECB Governing Council member Ernst Welteke was quoted as saying he sees no signs of deflation in Germany or in Europe and sees room for manoeuvre in monetary policy.

"I don't see deflationary dangers neither in Europe nor in Germany," Welteke said in a pre-released interview with Die Welt newspaper to be published today.

"If this development in exchange rates, oil and the economy continues, it is possible that this opens up additional room for monetary policy manoeuvres." The ECB kept interest rates steady at 2.50% on May 8, saying it needed more time to assess the economic trajectory of the eurozone economy now that uncertainty caused by the Iraqi war is dispersing.

Inflationary pressures are starting to ebb now oil prices have retreated.

Consumer prices rose an estimated 2.1% in April, down from 2.4% year on year rate in March.

Given the weak outlook with tame inflation, markets are pricing about an 80% chance that the ECB will cut official rates by 0.25 percentage points to a record low at its June 5 meeting.

An increasing number of market analysts are saying they may go further and cut by half a percentage point. A rate cut would coincide with updated economic forecasts from the ECB.

Currently, its official forecast is for growth in 2003 around 1.0%, with recovery taking holding later this year and growth returning to its potential annual growth rate of 2.0-2.50% in 2004.