Barclays Capital sees 1% eurozone growth

Barclays Capital has cut its forecast for eurozone growth in 2002 to 1% from 2.1%.

This prediction, following on from events of 11 September, is based on the idea that military intervention won't solve the current terrorist crisis immediately.

In this scenario, Barclays Capital predicts GDP growth in 2003 should be up at 2.5% on the back of a recovery in world demand and monetary stimulus from previous rate cuts.

Barclays Capital believes inflation should continue to trend downwards until mid-2002 on the back of lower oil prices and core inflation. As a result, it sees headline inflation reaching 2% in the fourth quarter of 2001, before spiking up temporarily in January next year.

According to the group's model, after reaching 1.3%-1.4% in mid-2002, inflation would rise up slowly, averaging 1.7% in 2003.

Barclays Capital also projects that ECB refi, or base, rates will fall further due to the combination of below potential growth and a benign inflationary outlook.

It foresees the ECB taking a further 100 basis points off the refi rate, meaning that it will trough at 2.75% in early 2002.

Unemployment is set to increase according to Barclays Capital, from 8.3% to 9.4% by the end of 2002.

As a result of the uncertainty caused by the time taken to solve the crisis and the fear of terrorist retaliation, Barclays Capital predicts confidence will fall until the second quarter of 2002 and then recover. It also says oil prices will fall below $20 before picking up.

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