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Euro-Zone Growth to Weaken, then Recover: Trichet

Euro zone economic growth is likely to be weak in the second and third quarters before staging a recovery, and second-round inflation effects need to be prevented, ECB President Jean-Claude Trichet said.

"Our base-line scenario is that we will have a trough in the profile of growth in the euro area in the second and third quarters of this year and, following this, a progressive return to ongoing moderate growth," he said.

Trichet made the comments in an interview with four European newspapers conducted on July 11 and published on Friday.

Growth risks included the "very significant financial market correction, the possible further increases in oil and commodity prices, and the possible unwinding of global financial imbalances", Trichet said, in a transcript of the interview which was published on the ECB's website.

Markets were still suffering from very severe turbulence, and the ECB remained determined to get inflation back below 2 percent, in line with its target, from the record 4.0 percent in June.

"The recent rise in unit labor costs is an indication that we have to take into account. So there are risks that we had to counter. I wouldn't say at all that second-round effects are a generalized phenomenon at present but we see signs that we have to take seriously," he said.

"Indeed our message is that we should avoid second-round effects."

Euro zone inflation has soared due largely to rocketing food and fuel prices.

The June data was followed on July 3 by the ECB's first interest rate rise in over a year, to 4.25 percent from 4.0 percent.

Trichet repeated that the ECB's decision to raise rates would go toward achieving price stability in the medium term, and his message was close to the one he delivered just after the rate rise.

"I have nothing to add or to withdraw from what I said before on behalf of the Governing Council -- that we trust that our decision to raise our key interest rate ... will contribute to achieving price stability."

"I also mentioned that we had no further indication for our future interest rates, that we are never pre-committed and that we will do in the future what is appropriate to deliver price stability," he said.

Most economists do not expect a further ECB rate rise this year.

However, some financial market instruments see a rise in rates to 4.5 percent as probable -- especially if oil and commodity costs feed through into wage deals and the cost of other goods and services, prolonging what the ECB hopes will be a temporary rise in inflation.

Credit Turmoil

Households had to accept the fact that, like in the 1970s, the economy would suffer even more if they tried to pass higher oil costs.

"The situation is not identical," Trichet said. "But, that being said, I trust that there are also important similarities. Today as in 1973-1974, there is a major transfer of resources from oil consumers to oil producers."

This was coming at the same time as the major financial turmoil, Trichet added.

"My assessment is that we are experiencing, since the month of August last year, an ongoing very significant market correction with episodes of turbulence, episodes of a high level of volatility and of hectic market behavior. Again, it is an ongoing process."

Bank recapitalization was helping to repair financial losses, Trichet said.

"That being said, we have to be constantly alert."

Trichet also reiterated major industrialized countries' call for China to speed up the appreciation of the yuan against other currencies.

"In my opinion, an acceleration of yuan appreciation would be in the interests of our Chinese partners, because it would mitigate inflationary pressure in China. But we have always said that this is the responsibility of the Chinese government."

On the strength of the euro and its impact on euro area growth, Trichet said it was very important that the U.S. president and Federal Reserve chairman had said that a strong dollar was in the interest of the United States.

Contact Europe: Economy

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