Euro Zone Economic Outlook Tepid, ECB Approaching Limits: Reuters Poll

By Shrutee Sarkar

The eurozone economy’s outlook remains stable, albeit lackluster, as indicated by a recent poll conducted by Reuters. Currently, the primary risks stemming from the UK’s decision to leave the European Union appear to be largely confined within British borders.

In response to the fallout from the Brexit vote on June 23, the Bank of England recently reduced interest rates to a historic low and reinstated its asset purchase program. Further easing is anticipated, which could prompt the European Central Bank (ECB) to consider additional measures as well.

However, confidence among economists regarding the ECB’s capacity for further action appears limited, given its previous unsuccessful attempts to achieve an inflation target of nearly 2 percent. The ECB has invested significant sums into asset purchases, now totaling 80 billion euros per month, provided low-rate long-term loans to stimulate lending, and lowered its deposit rate into negative territory at -0.4 percent.

Despite these efforts, a survey of over 60 economists projected that inflation will average just 0.3 percent this year and 1.3 percent next year, with expectations of not reaching the ECB’s target until at least 2019. These forecasts show only slight variation from previous predictions made last month, indicating a continued trend of lower highs and lower lows.

Growth projections are similarly muted, with the eurozone economy expected to average a quarterly growth of 0.3 percent until early next year, followed by a slightly improved 0.4 percent until the end of 2017.

Paul Mortimer-Lee, head of global market economics at BNP Paribas, commented that current forecasts indicate persistent slack in the eurozone economy, lasting longer than previously anticipated by both the market and the ECB. He attributed this stagnation more to the waning impact of temporary factors that had provided a short-term boost to growth rather than to Brexit.

The poll further revealed that the ECB is likely to maintain its negative deposit rate through the end of 2017, with only a small number of economists predicting another cut. Due to ongoing pressures for policy easing, the central bank is expected to extend its asset purchases beyond the previously set timeline ending in March 2017.