Financial environment.

Recent Statistical Trends. EU GDP Growth. The EU economy saw a slowdown in growth to only 0.3% in the third quarter of 2004, with the year-on-year growth rate easing to 1.8% as a result (see Exhibit 1). This reflected particular weakness in Germany and France in the third quarter, although growth held up better in Spain and Italy during that period. Earlier oil price rises mean that headline EU inflation remains above 2%, but underlying core inflation is still consistent …

…slowed in the face of an appreciating euro and somewhat weaker growth in the world economy since mid-2004. Moreover, recent business surveys suggest that growth remained modest in the fourth quarter, with exporters being hit by a further rise in the euro. Business confidence levels have also tended to remain relatively weak. Finally, manufacturing output falling and consumer spending growth moderating in the face of a cooling housing market and earlier interest rate rises. EXHIBIT 1