The European Banking Federation painted an optimistic economic outlook for the eurozone on Tuesday, saying high oil prices and a strong euro are unlikely to stifle growth. In its semi-annual forecast, it said growth in the 12-nation single currency area could accelerate to 2.0 percent in 2005 from 1.8 percent in 2004, while inflation should fall to 1.9 percent from 2.1 percent this year.
"In spite of all current risks, we believe that the euro area recovery will continue in 2005. There is less vulnerability in the European economy than generally believed," said Martin Huefner, chief of the Federation's Monetary Affairs Committee.
He told a news conference that expansion was expected to be underpinned by corporate investment, private consumption in some countries such as France and expansionary monetary policy by the European Central Bank, which would hold its rate on hold at 2.0 percent until mid-2005.
"Euroland's cycle is running slightly behind those of the United States and the main Asian economies, so we will be the only major area in the world to experience higher growth next year," Huefner said.
The Federation's outlook, based on a poll of chief economists, forecast the oil price would decline to average $38 a barrel in 2005 from recent highs of more than $50.
"The recent increase was largely speculative. Demand for oil is now falling while supply is growing," Huefner said.
He said eurozone bankers expected the ECB to raise its key interest rate twice, by 0.25 percentage point each time, in the second half of 2005. "Our message for the ECB on interest rates is that euro rates cannot follow the upward trajectory of US rates, at least for now," he said. The Federation expects the euro's exchange rate to remain slightly below $1.30 on average next year, but volatility could be high, with swings ranging from $1.20 to $1.40.
Stressing it was his personal view, Huefner said the ECB should not intervene to weaken the euro, unless it was concerted action by the world's main central banks. But the United States was unlike to agree to such a joint effort, he added.