ECB Cuts Growth Forecasts for the Eurozone

The European Central Bank (ECB) cut its growth forecasts for the eurozone economy on Thursday, indicating that a decline is very likely next year, while a return to growth is expected in 2014.

For the next year, the ECB sharply lowered its growth forecasts and now expects a range of a decline of 0.9 percent to a meager growth of just 0.3 percent. According to previous estimates for 2013, growth forecasts ranged from minus 0.4 percent to plus 1.4 percent, leading to the conclusion that the economy is more likely to grow rather than shrink.

The forecast for 2012 has also been slightly lowered, now expecting an economic decline of 0.5 percent, compared to the initially estimated decline of 0.4 percent, which the ECB predicted three months ago.

According to initial estimates for 2014, when a return to growth is expected, it should range between 0.2 to 2.2 percent.

“Economic weakness in the eurozone is expected to extend into next year. A gradual recovery should begin at the end of 2013,” said ECB President Mario Draghi at a press conference held after the bank’s regular meeting.

At today’s regular monthly meeting, the ECB kept the current key interest rate unchanged at 0.75 percent as expected. Draghi stated that interest rates were not lowered due to high indirect taxes and rising energy prices in some eurozone countries.

In the December macroeconomic projections, the ECB also lowered its inflation forecasts for next year. Annual inflation is now expected to range from 1.1 to 2.1 percent, compared to the previous estimate of 1.3 to 2.5 percent.

Draghi also informed banks that the ECB will continue to provide necessary liquidity in unlimited amounts as part of the bank’s refinancing operations for at least the next six months, until July 9 of next year.

So far, the ECB has not initiated a new plan for purchasing government bonds of struggling member states, which would help lower their high borrowing costs.

To date, no purchases of government debt from any struggling member state have been made, as Spain, which many consider the most likely candidate, has not yet met the main prerequisite, namely, it has not submitted an official request for assistance from the European crisis fund. The pressure on the ECB to intervene in the meantime is increasing.