Low inflation, weak growth to define eurozone over next 2 years

Very low inflation and modest growth will likely define the eurozone economy at least until the end of next year, a Reuters poll found, with only a slim chance the European Central Bank will increase its monthly bond purchases. 

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JAN 14, 20168:56 PM

[BERLIN] Very low inflation and modest growth will likely define the eurozone economy at least until the end of next year, a Reuters poll found, with only a slim chance the European Central Bank will increase its monthly bond purchases.

While China's slowing economy and its currency devaluations are at the centre of the recent global financial market turmoil, the relative calm in the eurozone will do little to mask its currently lacklustre, although not awful, fortunes.

Indeed, growth across the top economies of the eurozone appears fractured, with Germany outperforming and Italy showing signs of a nascent revival, while France and Spain continue a listless recovery that risks keeping unemployment high.

The poll of over 100 economists taken over the past week showed the eurozone economy expanding 0.4 per cent in each quarter until Q1 2017, one-tenth of a per centage point higher than the 0.3 per cent clocked in the third quarter of last year.

For the year, growth is seen averaging 1.5 per cent.

That may be a decent pace of growth by recent European standards, but it is still considered by many as inadequate to lower unemployment or lift inflation meaningfully.

"Growth should increase gradually, lowering the unemployment rate and finally increasing inflation. The improvement, however, would be very gradual and too slow to be satisfying," Louis Harreau, economist at Credit Agricole wrote in a note. "However, the ECB should refrain from adding more easing to the measures already announced: the effectiveness of the measures increase with more easing but at a slower pace, whereas their negative effects increase at a faster pace."

Many ECB policymakers are sceptical about the need for further policy action in the near term, Reuters reported exclusively on Thursday.

So far, the ECB has bought 600 billion euros of sovereign bonds, about twice the size of the Greek economy, cut the deposit rate to -0.30 per cent to deter banks from hoarding cash with the central bank and injected billions of euros into the economy to aid credit growth.

But apart from a slight increase in lending to businesses and stable growth, there is little else to show for.

Inflation, at 0.2 per cent, in December is only a fraction of the ECB's target ceiling of 2 per cent.

The poll showed inflation will only rise 0.6 per cent in the current quarter, sharply lower than the 0.9 per cent expected in last month's poll. For the whole of 2016, inflation will likely average 0.9 per cent before rising to 1.5 per cent next year.

The 2017 outlook - two years out - is slightly weaker than the 1.6 per cent inflation ECB policymakers predict by then.

With global oil prices widely expected to extend their slide this year, having fallen close to 19 per cent since the start of January after tumbling 35 per cent over 2015, the outlook for inflation is tepid.

Still, economists gave just about a one-in-three chance of the ECB increasing the amount of its monthly bond purchases over the next six months, down from 40 per cent in December.

This reflects rising pessimism among forecasters about the extent to which ECB President Mario Draghi can ease policy, especially with the German economy gaining momentum and resistance from its central bank over further stimulus.

"The failure of current measures to accelerate inflation may finally compel the ECB to increase monthly purchases to 80 billion euros in 2016 from the current 60 billion euros," said Tomas Holinka, economist at Moody's Analytics.

But eurozone economies are expanding at very different speeds and while some may need the extra stimulus, others seem to be performing just fine with no need for anything more.

The German economy, which just marked its best year in four, is forecast to enter 2016 on a strong footing, buoyed by low unemployment and healthy private consumption, despite a slowdown in its key export markets such as China and Brazil.

But the bloc's No. 2 economy, France, will likely post a stable, if unspectacular, 1.4 per cent growth this year, while Italy will continue the listless recovery in progress since it emerged from a three-year recession at the start of 2015.

REUTERS