The European Central Bank (ECB), which earlier today left its key refinancing rate unchanged at 0.75 percent, said the euro area economy would remain weak in the first part of 2013 and then gradually recover as the bank’s accommodative stance stimulates domestic demand and exports from the 17-nation area benefit from stronger global growth.
The ECB, which cut its refi rate by 25 basis points in 2012, said the risks to its economic outlook for the euro area remain to the downside due to weaker-than-expected demand, weak exports, slow implementation of reforms and geopolitical issues that could affect financial markets.
“These factors have the potential to dampen the ongoing improvement in confidence and thereby delay the recovery,” ECB President Mario Draghi told a press conference
Draghi’s expectation that the euro area economy will pull out of the current recession this year, but that risks are still to the downside, is a repeat of last month’s statement.
Inflation in the euro area is expected to decline further below 2 percent in coming months, based on oil price futures, and weak economic activity and well-anchored expectations should keep underlying price pressures contained, Draghi said.
The euro area inflation rate fell to 2.0 percent in January, around the ECB’s target of inflation of below, but close to, 2 percent. It was the first time in two years the inflation rate fell to 2 percent.
“Available data continue to signal further weakness in activity in the fourth quarter and at the beginning of 2013,” Draghi said, adding weakness reflected the impact of low consumer and investor sentiment on domestic spending, as well as subdued foreign demand.
“Later in 2013 a gradual recovery should start, with domestic demand being supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, and export growth benefiting from a strengthening of global demand,” he added.
Commenting on the liquidity of euro area banks, Draghi said that banks had repaid 140.6 billion euros of the 489.2 billion that they had borrowed as part of the ECB’s two three-year longer-term refinancing operations (LTROs), reflecting “the improvement in financial market confidence.”
In the the third quarter, the euro area’s economy contracted by 0.1 percent from the second quarter, which also contracted by 0.2 percent from the first quarter.
On an annual basis, the area’s Gross Domestic Product shrank 0.6 percent in the third quarter, following annual contractions of 0.5 percent in the second quarter and 0.1 percent in the first quarter.
The ECB expects the euro area economy to have shrunk between 0.4 and 0.6 percent last year, down from 2011’s expansion of 1.4 percent.
This year the economy is forecast to shrink by 0.9 percent or expand by 0.3 percent and in 2014 the euro zone’s GDP is forecast to expand between 0.2 and 2.2 percent.