By Nick Mann | 9 August 2012
The European Central Bank has cut its forecasts for eurozone economic growth in 2012 and 2013 and warned of continued risks to the single currency’s economic outlook.
Next year’s growth forecast has fallen to 0.6% from 1% three months ago, according to the bank’s latest survey of professional economic forecasters across Europe, published today. Their forecast for this year was also downgraded from a contraction of 0.2% to 0.3%.
According to the ECB governing council, the eurozone economy will recover ‘only very gradually’. Growth momentum will be further hampered by tensions in some eurozone sovereign debt markets, balance sheet adjustment by both financial and non-financial sectors and high unemployment.
Eurozone growth will also be weighed down by weak global growth momentum as the global recovery proceeds ‘unevenly, gradually and subject to considerable fragilities’. Geopolitical tensions in the Middle East could also push oil prices up, posing a further risk to the global economy, the ECB added.
Leaders in the single currency bloc were urged to take ‘fundamental’ action to address high government bond prices which were leading to ‘unacceptable’ fears that the euro could fall apart. ‘The euro is irreversible,’ the ECB said.
‘In order to create the fundamental conditions needed for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination,’ it explained.
Governments should also be prepared to use bailout funds in the bond market when ‘exceptional financial market circumstances and risks to financial stability exist’, it added.
While the ECB welcomed the significant progress made in fiscal consolidation over recent years, it said further ‘decisive and urgent’ steps were needed to improve competitiveness. ‘Fiscal adjustment in the euro area is continuing in 2012, and it is indeed crucial that efforts are maintained to restore sound fiscal positions,’ the ECB said.
‘At the same time, structural reforms are as essential as fiscal consolidation efforts and the measures to repair the financial sector,’ it added. In particular, it called for labour market reforms and increased economic competitiveness, measures that were preconditions for ‘robust, sustainable’ growth.
