ECB to dangle action as eurozone growth fears mount

FRANKFURT AM MAIN: Economists believe global headwinds will prompt the European Central Bank to lower growth and inflation forecasts, but the Frankfurt institution could also highlight ways of responding to the slowdown.

Expansion in the 19-nation eurozone slowed sharply in 2018 and is forecast to fall further this year, as geopolitical uncertainty, slowing growth in emerging markets and trade conflicts take their toll despite resilient domestic fundamentals.

ECB staff could cut their outlook for growth from the 1.7 per cent predicted in December by 0.2 or 0.3 percentage points, analysts say.

That would leave the central bank slightly more optimistic than the European Commission but less sanguine than the International Monetary Fund (IMF), both of which have trimmed their expectations since the start of this year.

“Any revision which does not go lower than the current consensus of 1.4 per cent is simply proof of the ECB’s sense of reality and no reason to panic,” ING DiBa bank economist Carsten Brzeski said.

Future growth is difficult to judge for now as “the eurozone still wobbles between decent domestic demand and increased external risks,” he added.

Both “soft” indicators such as business confidence and “hard” data like industrial production have fallen in recent months in the single currency area.

Trade conflicts between Washington, Brussels and Beijing, slowing growth in important export markets like China and looming uncertainty over Britain’s withdrawal from the European Union, or Brexit, have undermined confidence and slowed economic expansion.

ECB President Mario Draghi acknowledged in January that “risks surrounding the euro area growth outlook have moved to the downside” – but singled out such external factors as causes for the gloomier picture.

Domestically, unemployment held steady in February at 7.8 per cent, its lowest level since 2008, the EU statistics authority Eurostat said last week.

And wages are rising in countries like Germany where shortages of skilled workers are making themselves felt.

But the stronger labour market has not had the expected impact of boosting inflation towards the ECB’s target of close to, but below 2.0 per cent – the core of its mandate to secure price stability over the medium term.

Year-on-year price growth was just 1.5 per cent in February and 1.4 per cent in January, Eurostat said, with the “core” figure – ruling out volatile items like food, alcohol and energy – even lower at 1.0 per cent.

The ECB will likely further reduce its inflation outlook Thursday from December’s projections, which called for the rate to rise from 1.6 per cent this year to 1.8 per cent by 2021.

Some observers see the ECB blocked from responding to the soft patch in growth after years of crisis firefighting. — AFP