–HICP Inflation Projections Also Cut To Well Below ECB 2% Threshold

FRANKFURT (MNI) – The European Central Bank’s staff sharply cut its
Eurozone growth forecast for next year, showing the currency bloc is
likely to suffer a second year of contracting economic activity, ECB
President Mario Draghi said Thursday.

The forecast for 2013 inflation was also revised down to well below
the ECB’s price stability threshold of “close to but below 2%.” And the
central bank produced its first forecast for 2014, which showed consumer
inflation dropping even further.

Speaking at his monthly press conference, Draghi unveiled ECB staff
projections showing Eurogroup GDP growth in a range of -0.6% to -0.4%
this year, giving a midpoint of -0.5%, slightly below September’s -0.4%
midpoint forecast.

For 2013 the downward revision was much sharper, showing a midpoint
forecast of -0.3%, which represents a significant reversal from the
ECB’s June forecast of +0.5%. The first 2014 estimate showed the economy
recovering to 1.2%.

“The Governing Council sees downside risks for the Eurozone
economy,” Draghi said. Among those risks are the ongoing sovereign debt
crisis, potential pitfalls in European policies to address the crisis,
and the fiscal situation in the U.S., where a pre-programmed $600
billion package of tax hikes and spending cuts could push the economy
into recession at the beginning of the year unless President Obama can
reach an agreement with Congress on a more gradual alternative plan.

The Eurozone economy contracted by 0.1% q/q in the third quarter,
as sagging investment and a drag from inventories offset a boost from
foreign trade. Euro area GDP had already shrunk by 0.2% in the second
quarter after stagnating in the first.

Though hard data has been weak, recent leading indicators – in
particular, an uptick of business confidence in Germany, France, Belgium
and in the European Commission’s Eurozone sentiment survey – suggest the
economy could be close to bottoming out. This is corroborated by an
0.8-point upturn in the Eurozone composite PMI in November.

But sentiment levels are still deep in recession territory, and the
latest rise does not necessarily foretell significant upward momentum.
Fiscal tightening will continue to weigh on activity next year, while
rising unemployment and subdued wage gains will dampen consumer
appetites.

Draghi noted the recent uptick in some of the confidence
indicators, but he made clear, as did the new ECB forecasts, that the
economic weakness of the Eurozone will extend well into 2013.

The new staff forecasts make the ECB somewhat less optimistic than
other Eurozone growth forecasts.

The European Commission, in its Autumn Forecast published last
month, projected that the Eurozone economy would shrink by 0.4% this
year, then eke out the scantest of recoveries in 2013 with growth of
+0.1%, before accelerating to +1.4% in 2014.

The Commission argued that while fallout from Europe’s financial
crisis continues to weigh on the economy and uncertainty is high, there
are two reasons for optimism. The first is that “major” policy decisions
taken by European leaders have “significantly reduced tail risks and
relieved market stress.” The second is that tangible economic
adjustments are taking place, including the reduction of large current
account deficits, the Commission noted.

The Commission’s projections were very close to the International
Monetary Fund’s most recent forecasts, which put Eurozone GDP at -0.4%
in 2012 and +0.2% next year. The possibility of another eruption in the
euro area crisis “remains a major downside risk to growth,” the IMF
warned.

The OECD is slightly more pessimistic, projecting that the Eurozone
will contract not only this year but – as with the new ECB staff
forecasts – in 2013 as well. The OECD’s November forecasts show euro
area GDP dropping 0.4% this year and another 0.1% in 2013, before
recovering to +1.3% in 2014.

In its recent Economic Outlook, the OECD said the euro area still
holds “the greatest threats to the world economy,” and it cautioned that
“challenging fiscal sustainability conditions in some [EMU] countries
risk sparking a chain of events that could considerably harm activity in
the monetary union and push the global economy into recession.”

The Survey of Professional Forecasters published in the ECB’s
November Monthly Bulletin showed the Eurozone economy shrinking 0.5%
this year, followed by a small pickup to +0.3% in 2013 and +1.3% in
2014.

On HICP inflation, Draghi said the ECB staff now projects a 2.5%
rate in 2012. For 2013, the ECB projects HICP in a range of 1.1% to
2.1%, with a midpoint of 1.6%, down from the September forecast of 1.9%
and well below the central bank’s price stability threshold. In its
first inflation forecast for 2014, the ECB staff projected HICP would
slip even further to a range of 0.6% to 2.2%, yielding a midpoint of
1.4%.

EMU HICP slowed in November to 2.2%, a 23-month low, as the upward
trend in energy prices, as well as in the cost of food, alcohol and
tobacco, slowed, Eurostat reported in its “flash” estimate.

Draghi said that “based on current future prices for oil, the
inflation rate is expected to decline further to below 2% next year. He
said future inflation expectations are “well anchored” and “underlying
price pressures should remain moderate.”

The most recent Survey of Professional Forecasters, like the ECB
forecasts showed inflation at 2.5% this year, though it projected
significantly higher inflation 1.9% for both 2013 and 2014.

The OECD sees a bigger downside risk on prices, projecting that
HICP will drop sharply to 1.6% in 2013 and 1.2% the following year,
after 2.4% this year.

The IMF warned that “there is a risk of core inflation
undershooting targets” in the advanced European economies.

The following table contains the ECB’s new forecasts, compared with
the ones issued in September.

December Projections September Projections
Range Midpoint Range Midpoint
2012 GDP -0.6% to -0.4% -0.5% -0.6% to -0.2% -0.4%
2013 GDP -0.9% to +0.3% -0.3% -0.4% to +1.4% +0.5%
2014 GDP +0.2% to +2.2% +1.2% First Forecast
2012 HICP 2.5% (no range) 2.5% +2.4% to +2.6% +2.5%
2013 HICP 1.1% to 2.1% 1.6% +1.3% to +2.5% +1.9%
2014 HICP 0.6% to 2.2% 1.4% First Forecast

–Paris newsroom, +331-42-71-55-40; bwolfson@mni-news.com

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