Published On : 01/10/2024

Euro zone economy bottoming out, but outlook weak, ECB policymakers say

FRANKFURT (Reuters) -The euro zone may have been in recession last quarter and prospects in the near term remain weak, European Central Bank policymakers said on Wednesday as they reaffirmed the bank’s policy stance.

Euro zone growth has been hovering on either size of zero for most of 2023 and only a mild pick up is seen this year, helping to cool inflation, which has overshot the ECB’s target for years and forced policymakers to raise interest rates to record highs last year.

“There is evidence that sentiment indicators are bottoming out, but the near-term economic outlook remains weak in line with our projections,” board member Isabel Schnabel said on social media platform X.

Her colleague, Vice President Luis de Guindos, meanwhile, suggested the bloc may have suffered a recession in the second half of last year and risks to future growth were tilted to the downside.

“Soft indicators point to an economic contraction in December too, confirming the possibility of a technical recession in the second half of 2023 and weak prospects for the near term,” de Guindos said in Madrid.

The ECB has signalled steady policy in January and neither policymaker deviated from that message, even if Schnabel appeared to take aim at market bets for rapid interest rate cuts later this year.

Investors have priced in at least five rate cuts in 2024 year with the first move coming in March or April, a timeline several policymakers have called excessive given lingering price pressures.

Schnabel said that financial conditions have loosened more rapidly than projected by the ECB, a potential source of inflation, but energy prices have also been weaker than forecast.

Both de Guindos and Schnabel repeated that ECB policy is “data dependent,” central bank speak for a period of uncertainty when firmer guidance is inadvisable, but Schnabel argued that ECB policy was “on track” to get inflation back to 2% in 2025.

Inflation fell rapidly through most of 2023 but jumped back to 2.9% last month, mostly on technical factors, and may hold around this level for some time.

“Positive energy base effects will kick in and energy-related compensatory measures are set to expire, leading to a transitory pick-up in inflation,” de Guindos said.

ECB projections see inflation back at target only next year but a host of private forecasters disagree and think the ECB is underestimating disinflation in much the same way it missed inflation on the way up.

(Reporting by Balazs Koranyi and Francesco Canepa;Editing by Alison Williams and Christina Fincher)

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