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Euro zone slowdown has bottomed but no big bounce in sight

Written by Business World, on 17th Jan 2020. Posted in EU

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The slowdown in euro zone economic activity has probably bottomed out, according to a Reuters poll, which showed while the outlook for growth and inflation remained lukewarm the chances of a recession have faded somewhat.

That comes after the European Central Bank aggressively eased policy, including cutting its deposit rate deeper into negative territory in September and later resuming its asset- purchases program.

Economists polled by Reuters Jan. 13-16 were slightly more upbeat compared with the previous few months, amid improved sentiment around the U.S.-led trade war. But the majority made little change in their point forecasts for growth and inflation for this year, next year and 2022.

Nearly 80% of economists who answered an additional question said euro zone economic activity had bottomed out.

"Economic growth has bottomed out, but we don't think it will pick up by much anytime soon, either. It is going to flat- line at the current low levels," said Moritz Degler, senior economist at Oxford Economics.

"Any pick-up would likely need to come from the industrial sector and that situation would improve only if there was a permanent resolution to the trade conflict between the U.S. and China. We don't think that is very likely."

The poll of over 100 economists predicted euro zone economic growth would average 1.0% this year. That would be lower than last year's 1.2% and would the weakest pace of growth since a recession in 2013.

Growth in the euro zone's major economies was also forecast to be tepid. Germany - the biggest economy in the region - was predicted to average 0.7% growth in 2020, inching up from 0.6% in 2019, which was its slowest growth in six years.

Inflation across the bloc was not forecast to pick up substantially, either.

Not a single contributor predicted inflation would rise above the ECB's medium-term target of just below 2% at any time during the polling horizon, which was through to mid-2021. Annual averages suggest the ECB will fail to deliver on its inflation mandate at least until 2022.

After having failed to achieve that target for several years, ECB policymakers are set to open a strategic review of their monetary policy framework soon, the first in close to two decades.

That policy re-evaluation is likely to cover issues ranging from questions about the central bank's inflation target to its role in preventing climate change.

But over 80%, or 48 of 59, respondents who answered a separate question said the review would not lead to significant changes in monetary policy.

"A radical change in the inflation objective would be required for a radical change in the monetary policy outlook. This looks unlikely. Evolution, not revolution, is more probable," said Ken Wattret, chief European economist at IHS Markit.

Debate regarding the side effects of negative rates has grown and market pressure has increased for the ECB to follow in the footsteps of Sweden's Riksbank, which recently turned away from its negative interest rate policy.

But over three-quarters of the economists, 46 of 57, said the ECB should not move away from negative rates this year.

That lines up with the consensus for the ECB's deposit and refinancing rates, which were predicted to be unchanged at -0.50% and 0% respectively this year.

"Raising rates now would be disastrous for the economy, so they are certainly not going to do that. Of course, there are negative side effects (from holding rates below zero), but at this point the benefits clearly outweigh those effects," said Oxford Economics' Degler. (Reuters)

Source: www.businessworld.ie

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