Trichet: oil prices won’t hit growth

SOARING oil prices will not damage EU recovery the European Central Bank President Jean-Claude Trichet said yesterday.

However a report by Davy Stockbrokers warned that oil prices will stay well above normal levels for the next two years.

Davy expects oil prices to stay at $40 per barrel (pb) next year, dipping marginally to $37 in 2006.

Previously Davy had projected a $35pb for next year, falling to $30pb in 2006.

In the context of the changed prices Davy has made further significant adjustments to the profit outlook for the air industry.

Having previously adjusted forecasts for British Airways, Lufthansa and SAS, it has now revised its view of the rest of the transport sector, including Irish Continental Group.

Earnings for all of the transport groups on sea or in the air have been revised downwards for the next two years, with Ryanair coming off best in what is set to be a very difficult environment.

The financial year 2005/2006 is the hardest hit by the change in oil prices with Earnings Per Share in Lufthansa due to fall a whopping 80% on the broker’s previous EPS forecast.

Despite the turmoil in the oil markets, Mr Trichet said yesterday on French radio: “I don’t think we need to revise our forecast for growth in Europe. I maintain our confidence in the continuing gradual pickup that we have seen materialising in the past months.”

His comments tie in with the US Federal Reserve chairman Alan Greenspan, who sees no immediate threat to global growth.

Oil prices have climbed 41% this year amid increased demand and concerns over supply disruptions from countries including Iraq and Venezuela.

The central bankers’ optimism follows slowing second-quarter growth in the US, Europe and Japan.

Government reports yesterday showed Germany’s domestic economy unexpectedly contracted in the quarter and Belgian business confidence tumbled this month.

However, the ECB, which has held borrowing costs at a six-decade low of 2% for 15 months to support an economic rebound, forecasts growth of 1.7% this year in the euro region. That would be up from 0.4% in 2003, the slowest pace in a decade.

“We’re not in 1974 or at the end of the 70s, when we had oil shocks”, said Mr Trichet yesterday. “Prices have risen to a lesser extent, fortunately.”

According to the New York-based Economic Cycle Research Institute, the inflation-adjusted cost of a barrel of crude from the Middle East is about $40, almost half the peak of $77.86 reached in 1981.