EFN report on the Euro area outlook

The European Forecasting Network (EFN) is a research group of European institutions, founded in 2001 under the auspices of the European Commission.This is the Third Report of the European Forecasting Network on the Euro area. Although on each occasion we started at the pessimistic end of the spectrum of forecasters, we are yet again revising downwards our forecasts for 2002 and 2003. Growth of 0.8% in 2002 will be followed by only 1.2% in 2003 and 2.1 % in 2004. This anaemic recovery from the downturn in 2001 has been exacerbated by a series of negative shocks including rising oil prices and the considerable uncertainty about the prospects of the Iraq war that have depressed consumption, investment and world trade. Moreover, the pre-occupation with a ceiling for the inflation rate of 2% has meant that the ECB has had to be rather cautious in its policy choices. The effects of the mildly expansionary monetary policy are balanced by the behaviour of unit labour costs and the output gap. Overall, our forecast for HICP inflation is 2.4% for 2003 and 1.8% for 2004, not too far from the recent years’ average of 1.9%. A target of 2% in the HICP with a symmetric error margin of plus or minus 1% would have allowed the ECB to be more relaxed in its setting of monetary policy and to give greater weight to short run movements of output