Journal Issue

Staff Report for the 2006 Article IV Consultation Supplementary Information

International Monetary Fund
Published Date:
August 2006
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1. This supplement provides an update of economic and policy developments since the release of the Euro Area Policies staff report. The thrust of the staff appraisal remains unchanged.

2. New data are broadly in line with staff forecasts:

  • Revised national accounts data show that domestic demand and net exports in the first quarter were stronger than originally reported, mainly on account of investment and exports. Consumption growth, which has been volatile, reached 2.4 percent following 0.4 percent in 2005:Q4.
  • Various recently-released indicators confirm that activity in 2006:Q2 is strong and that near-term risks are on the upside. The euro area industrial new orders index increased by 2.3 percent in May 2006, while that for production grew by 1.6 percent, following smaller declines during previous months. Car sales were strong but retail trade volumes fell by 0.6 percent in May and thus continue to move broadly sideways since fall 2005. Both the manufacturing and the services PMI indicator inched up again, reaching the highest levels since summer 2000. National indicators generally increased but a few lead indicators have retreated albeit from very high levels.
  • Financial market participants generally expect quarterly real GDP growth of around 0.6-0.8 percent in 2006:Q2 and Q3. Staff’s latest forecasts and those of the Commission are at the lower end of this interval.

3. Headline inflation remained stable at 2.5 percent in June. There is no evidence of acceleration in underlying price pressures, including wages, which stood 2.1-2.2 percent above last year’s level in 2006:Q1, notwithstanding a further small decline in the unemployment rate, to 7.9 percent in May. Oil prices are running somewhat above US$70 per barrel, the price underlying staff projections for 2007.1 Inflation expectations have remained broadly unchanged and monetary and credit growth strong.

4. At its July 6 meeting, the ECB left interest rates unchanged but gave indications that led market participants to expect an interest rate increase on August 3. The ECB statement said that the Governing Council will exercise “strong vigilance,” which is widely interpreted as a pre-announcement of a rate hike. An August rate hike would represent an acceleration relative to the once-a-quarter tightening pace followed thus far. Market see rates at 3½ percent by end-year.

5. Financial integration is proceeding. Regarding securities clearing and settlement, the Commission has opted against legislative action at this stage but called on market participants to put in place a code of practice to achieve integration that would contain specific objectives and deadlines so that progress could be monitored by the Commission. The ECB has announced that it is examining the possibility of providing a cross-border securities settlement system. Meanwhile, the Commission’s Competition Directorate has published an interim report that shows that European retail banking markets remain highly fragmented and characterized by a range of entry barriers. The report is intended for consultation and no enforcement or policy actions are expected in the near future.

1An increase by 10 percent per barrel would add 0.1 percent to inflation, according to staff estimates.

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