European Central Bank Trims Forecast

It seems that the downtrend in global demand that we have experienced this year has taken most governments and central bankers by surprise since they have had to revise expectations downwards. The latest to do so has been the European Central Bank and the uncertainty in the projection can be seen in the width of the band – ECB is expecting that Eurozone growth for 2013 will lie between minus 0.9% and plus 0.4%. Its projection for 2014 is even less precise with growth expected to fall in the band between 0.2 and 2.2%.

ECB President, Mario Draghi, noted that persistent uncertainty was having a negative effect on economic activity within the Eurozone. The rumbling sovereign debt crisis continues to represent a region-specific downside risk, but he also recognised the dangers to the wider world of a US failure to avoid slipping over the edge of the fiscal cliff. Should this happen, the US would be likely to fall into recession and the knock-on effect would further dent global confidence and demand.

On a more positive note, Draghi expects that a recovery will start later in the New year as a result of "strengthening global demand and a significant improvement in financial market confidence".

The ECB is also predicting that inflation will dip below the 2% mark in the course of 2013. Inflation has eased from 2.5% to 2.2% last month. The ECB cited the decline in inflation as one reason why it left the main interest rate unchanged at 0.75%. The rate was reduced from 1% in July in a bid to stimulate the Eurozone economy by providing cheaper money to the business sector – the rate is now at an historic low. Many of the foundations for economic growth are in place, but the key component that remains elusive is confidence. Businesses are reluctant to take on new debt or engage staff when they are not confident that business conditions will either stay stable or improve – the resolution of fiscal cliff negotiations in the USA will be a critical event, one way or another.

Dr. Mike Campbell
Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.