ECB remains cautiously upbeat

The European Central Bank (ECB) is taking a guardedly upbeat view on economic growth, according to its vice-president, Mr Lucas Papademos.

"We are more optimistic than we were a few months ago," he said of the international economic situation, quoting indications from data "which lead to the conclusion that the recovery is strengthening and is becoming broader... This conclusion primarily reflects evidence from the US and Asian economies where the pace of recovery is gaining momentum."

The main risks to growth internationally relate to "the heritage of the years of boom" in terms of large external imbalances, particularly in the US, and high consumer and business debt levels. These introduce a "degree of uncertainty about the sustainability of spending in the coming years".

Looking at the euro zone, Mr Papademos said: "Our main scenario that we have presented over the past few months still remains valid. We are expecting a gradual and moderate economic recovery" with growth picking up later this year and gathering momentum in 2004. Growth could be close to its long-run potential in the second half of next year, he said.

The ECB was more confident than it was a few months ago about its forecast of gradual euro-zone recovery, he said, and it believed the risks to growth were broadly balanced.

However, most of the positive indications are primarily survey-based and the ECB is watching closely for harder economic data to provide more evidence.

Does the recent rise in the euro's value threaten to undermine the growth outlook?

Mr Papademos said it was important to place exchange rate movements in time perspective. The very recent rise in the euro's value against the US dollar was reversing a fall in August, he said, while the appreciation over the past 15 months or so was from a position where the currency was at "very low levels, not in line with fundamentals".

The euro's current external value was more in line with the fundamentals of the euro area and closer to historical averages, he said, both in terms of nominal and real effective exchange rate (adjusting from relative inflation levels). The latter - a measure of price competitiveness - was now close to the average level over the past 15 years, he said.

Meanwhile, the strengthening euro will have a favourable impact on bringing down inflation over the medium term and was a factor in the ECB's assessment that price inflation would fall "clearly below 2 per cent" next year.

"The low levels of short- and long-term interest rates were contributing to the recovery." There were also indications that lower inflation was supporting consumer demand, he said, while the impact of the rising euro on exporters was counteracted by faster than previously expected growth in international markets.

It is no surprise then that Mr Papademos said the ECB assessment was that current interest rates were "appropriate".