Eurozone told to brace for another year of recession

 
Tim Wallace
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THE EUROPEAN Central Bank (ECB) slashed the currency area’s growth forecasts yesterday, predicting another year of recession as the battered peripheral economies struggle to turn their fortunes around.

President Mario Draghi now expects Eurozone GDP to fall by 0.3 per cent next year, well down on its previous forecast for growth of 0.5 per cent.

It came as new data confirmed the currency area is officially back in recession. Output fell 0.1 per cent in the third quarter of this year, the second consecutive quarterly drop.

Meanwhile Greek unemployment hit a new record of 26 per cent in September, up from 18.9 per cent a year earlier. Youth unemployment now stands at 56.4 per cent, up from 47.6 per cent in September 2011.

And French unemployment increased again in November, hitting a 13-year high of 10.3 per cent.

Meanwhile ratings agency Standard and Poor’s warned the default rate among speculative-grade European firms is set to rise from 6.3 per cent this year to 6.8 per cent by the end of 2013.

But despite the deluge of grim economic news, Mario Draghi defended his decision to hold interest rates steady at 0.75 per cent.

“Between July and today some governments have seen interest rate spreads come down by 200, 250 basis points – that is much more of an impact than we would have seen from reducing the short-term policy rate,” Draghi said.

He argued the announcement of the outright monetary transactions (OMT) programme has given markets a major confidence boost, reducing the need for conventional action on rates.

Under the OMT the ECB will buy Spanish government bonds if the state requests a bailout and submits to certain conditions on economic reform.

But as the ECB cut its inflation forecast to 1.6 per cent in 2013 and 1.4 per cent in 2014, analysts believe there may be room for a rate cut in future.

“With lower-than-expected staff projections on growth and the inflation projection clearly below two per cent in 2014, the ECB leaves the door open for a rate cut soon,” said Citi’s Jurgen Michels. “However, unless there is disappointing news on growth and/or a substantial drop in December inflation, a rate cut in January looks unlikely to us.”