Euro-zone economy 'set to rebound in 2005'

The euro-zone economy will rebound in the second half of next year and the European Central Bank will keep interest rates unchanged until then, according to an analysis from a group of leading EU think tanks.

The Euroframe Network said last night that the euro-zone economy would grow by 1.8 per cent in 2004, accelerating to 2 per cent next year.

The group, which comprises nine economic forecasting institutes, views current oil-price-induced weakness as a pause in the economic upturn.

"With the oil price declining during the coming year, a rebound can be expected in the second half of 2005," it said.

The group described this as a "steady, if underwhelming" economic performance.

The Euroframe network, which includes Ireland's Economic and Social Research Institute (ESRI), recently won a three-year contract to produce a twice-yearly report on the euro-zone economy for the European Commission.

The first report in this series will be published in March, with the ESRI to co-ordinate and lead the release. The study will focus on outsourcing and offshoring issues.

Euroframe is expecting private investment to record a slight pick-up this year, after posting a drop in each of the three previous years.

"The softness of the current upswing reflects hesitancy on the part of enterprises and consumers to spend and the negative impact of the stronger euro on net exports," the network pointed out.

Euroframe highlighted higher oil prices and a sustained appreciation in the euro as major downward risks to an otherwise relatively benign outlook.

The group is expecting inflation to fall slightly in 2005, but to remain close to 2 per cent.

It said the ECB would keep interest rates unchanged for the first half of the coming year, unless second-round effects of oil-price increases emerge.

Euroframe sees the bank raising rates into 2006, in line with its "medium-term orientation".