LATEST EUROZONE

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LATEST EUROZONE
FORECASTS
(per cent changes in GDP)

2003
2004
European
1.0
2.3
Commission
(4 April, 2003)
IMF
1.1
2.3
(8 April, 2003)
OECD
1.0
2.4
(15 April, 2003)



The
Economist's
1.1
2.1
panel
(10 May, 2003)
OEF
0.9
1.6

(10 May, 2003)



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REVISIONS TO OEF
FORECASTS
(GDP percentage changes)
2004

2003

November, 2002


U.S.
2.2
3.1
Eurozone
1.4
2.5
U.K.
2.6
2.9


May, 2003



U.S.
2.4
3.6
Eurozone
0.9
1.6
U.K.
2.0
3.0
Differences
U.S.
0.2
0.5
Eurozone
-0.5
-0.9
U.K.
-0.6
0.1
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EUROPE'S PROSPECTS
(GDP percentage changes)

2002
2003
2004
2005
Eurozone
0.8
0.9
1.6
2.2





Germany
0.2
0.5
1.0
1.5
France
1.2
0.7
1.7
2.3
Italy
0.4
1.1
1.5
2.3
Spain
2.0
1.6
2.3
2.9
Netherlands
0.2
0.4
1.6
2.3
4.0
Belgium
0.7
1.0
1.7
2.3





U.K.
1.8
2.0
3.0
2.5
Sweden
1.8
1.2
2.3
2.5
Switzerland
0.1
1.0
2.1
2.1
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U.K. HOUSE PRICES AND
INTEREST RATES
20
200
House
prices
180
15
Short-term
interest rate
160
10
140
120
5
100
80
0
1980


1985

1990

1995
2000
In real terms 1980 100
Source
The Economist
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U.K. - APPRECIATION AND
GROWTH
(percentage changes)
Real
GDP


growth
appreciation



1978-81
46.7

1979-81

-1.8



1995-2000
41.0

1996-2000
2.9


Average annual percentage changes
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U.K. EXPORT
PERFORMANCE AND REAL
EXCHANGE RATE
-80
Relative ULCs
4
(1995100 invtd. scale)
-90
2
-100
0
-110
-2
-120
-130
-4
Export perform.
in manufacturing
-140
(3 yrs.mov.avrgs.)
-6
-150
1975


1980


1985

1990

1995
2000
Difference between growth of exports and growth
of export markets.
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HOUSE PRICES
(1980 100)
200
U.K.
180
160
140
120
Eurozone
100
United
States
80
1980


1985

1990

1995
2000
In real terms
Source
The Economist
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EFFECTIVE EXCHANGE
RATES
(1995 100)
95
134
Dollar
Euro
90
(r.h.sc.)
129
Pound
85
124
80
119
114
75
2000
2001
2002
2003
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WORLD DISCREPANCY ON CURRENT
ACCOUNT AND U.S. CURRENT BALANCE
( billion)
billion
0
0
-40
-100
Statistical discrepancy
-80
(left hand scale)
-200
-120
-300
U.S. Current
-160
balance
(right hand scale)
-400
-200
-500
-240
1970
1975
1980
1985
1990
1995
2000
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PRODUCTIVITY GROWTH DIFFERENTIAL
AND DOLLAR'S REAL RATE
Indices (1971 100)
Differ. between productv.
1
growth in U.S. and in E.Z.
(l.h.sc.)
130
0
-1
110
-2
Dollar's real
exch. rate (r.h.sc.)
-3
90
1973
1977
1981
1985
1989
1993
1997
2001
GDP per employed 3 years moving averages
J.P.Morgan's broad index 1995 100
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CURRENT BALANCES
(in per cent of current price GDP 3 years moving
averages)



2
Finland
0
0
(1984-95)
0
United States
United States
(1980-2006)
(1980-2005)
Canada
-1
-1
-2
(1971-97)
Denmark
(1975-92)
-2
-2
-4
United States
-6
(1980-2005)
-3
-3
Australia
Ireland
-8
(1977-2002)
(1975-92)
-4
-4
-10
-5
-5
-12
1
6
11
16
21
1
6
11
16
21
1
6
11
16
21
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THE DOLLAR'S
DEPRECIATION
(from end-February 2002 to mid-May 2003)
Weight in
Per cent


bilateral
change
trade



Total
-17.8
...



vis-a-vis


Latin America
-13.1
19
East Asia
3.2
20
Japan
16.4
10
Canada
16.7
20


Eurozone
33.3 15




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GROWTH OF EXPORTS
(volumes 3 months mov. avrgs.)

United
15
Kingdom
10
Eurozone
5
0
-5
United
States
-10
-15
2001
2000
2002
1999
1988
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EUROZONE - GROWTH OF
OUTPUT AND OF DEMAND
(average annual percentage changes)
Foreign
Domestic

GDP
balance
demand
contrib.
1995-2000
2.6
2.5
0.1



2000-2003
1.0
0.6
0.4



2003-2005
1.9
1.8
0.1






Contribution to change in GDP.






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ANGLO-AMERICA vs. THE EUROZONE
Changes between 2000 and 2003
Eurozone

U.S.
U.K.






Struct. primary
-3.4
-2.2
-0.1

budget bal.

Short-term int.
-4.6
-2.5
-2.1

4.0
rates

Real short-term
-3.8
-2.6
-1.1


interest rates
OECD estimates. Deflated by CPI index
one year ahead. -3.8 using headline RPI
index.

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EUROZONE POLICY
SIMULATION FOR 2001-03
Monetary Policy
Same short-term interest rates as in
the United States from 2001 Q1
onwards
(short-term interest rates were the same in 2001
Q1)
Fiscal Policy
Ex-ante budget deficits set at -2.9 per
cent of GDP in cyclically adjusted
terms in Germany, France and Italy in
2002-03
(some expansionary fiscal policies also in 2001
and in Spain
throughout the period)
Exchange Rate
Actual exchange rate to 2003 Q1 as in
base thereafter
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COMMENTS ON
ASSUMPTIONS - 1
Fiscal Policy
Assumed to take the form of increases
in expenditure
Hence impact quite strong

Monetary Policy
Assumed not to have an effect on the
exchange rate
Hence impact quite weak
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COMMENTS ON
ASSUMPTIONS - 2
Exchange Rate
Euro could be lower because of lower
interest rates
Euro could be higher because of
higher expected growth
Confidence
Confidence could be boosted by
expectations of higher growth
Confidence could be depressed
because of fears of higher deficits,
debt and inflation
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SIMULATION OUTCOME - 1
Eurozone Totals
Base
Simulation

forecast
result


GDP growth


2001
1.4
2.2
2002
0.8
2.3
2003
0.9
1.5



Budget deficit

2001
-1.5
-1.7
2002
-2.2
-2.5
2003
-2.7
-2.9
In per cent of current price GDP.



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SIMULATION OUTCOME - 2
Average annual GDP growth 2001-03
Base
Simulation

forecast
result
Eurozone
1.0
2.0
Germany
0.5
1.5
France
1.3
1.8
Italy
1.1
2.8
Spain
2.1
3.6
Memorandum item
United States
1.7
1.7
United Kingdom
2.0
2.1





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LENDING RATES
10.4
Germany
9.4
8.4
Belgium
7.4
6.4
Italy
5.4
Spain
4.4
Netherlands
3.4
ECB refinancing
rate
2.4
1999
2000
2001
2002
31
EMU MONETARY POLICY
2003
Does One-Size Fit All ?
GDP
Real short-
Inflation



growth
term rate




Germany
0.4
1.2
1.8
Austria
0.3
1.6
0.6
Belgium
1.0
1.6
0.5




Spain
1.6
3.7
-0.3
Greece
3.6
3.6
-0.5
Ireland
3.2
4.3
-0.9







Nominal ECB rate deflated by expected consumer
prices inflation in 2004.
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EMU BUDGETARY TARGETS AND
FORECASTS
(general goverment net lending in per cent of GDP)


Forecast

Target
2003
2004
2005
2005




Germany
-3.6
-3.5
-3.3
0/-0.5




France
-3.5
-3.3
-2.8
0/-0.5
Italy
-2.5
-3.1
-2.8
0/-0.5
Spain
-2.0
-1.7
-1.5
0/-0.5
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EUROPE'S (AND JAPAN'S)
LONGER-RUN PROBLEM
An area with a relatively high saving propensity
These high savings can be absorbed by
i) High budget deficits
No longer possible given Stability Pact
ii) High domestic fixed investment
This needs a low cost of capital
Real interest rate too high
Equity prices now too low
iii) High current account surpluses
These need a low real exchange rate
Markets are leading to Euro
appreciation
Wage moderation insufficient
given low
inflation climate