Prospects for the 12-state euro zone will brighten next year when the economy will begin to recover, the European Central Bank said yesterday. "The conditions exist for a recovery to take place in the course of 2002 and economic growth to return to a more satisfactory path," the ECB said in its monthly bulletin for November.
"The economic fundamentals of the euro area are sound and there are no major imbalances which would require a prolonged adjustment," the report continued.
"The uncertainty currently overshadowing the world economy should diminish over time." A substantial slowdown in inflation and tax reductions in several euro-zone countries should have further positive effects on growth, the ECB argued.
The ECB slashed half a percentage point off its key interest rates last Thursday, bringing the bank's central "refi" refinancing rate to 3.25 per cent, its lowest level since spring 2000. The bank had been able to reduce borrowing costs because of the "further abatement of inflationary pressures". "The new level of interest rates is appropriate to maintain price stability over the medium term. This, in turn, will favour an economic environment conducive to restoring higher economic growth in the euro area," the ECB said.
Nevertheless, in the immediate term, the outlook was less rosy. "Several economic indicators, which have become available for the euro area and beyond, point to weakening demand of both domestic and external origin," the ECB said.
"In line with this, and taking into account expectations for further weak data in the period ahead, forecasts and projections will in all likelihood show downward revisions." The ECB is scheduled to publish its own staff projections in the next monthly bulletin in December.
Euro-area gross domestic product (GDP) growth was expected to be weak in the second half of this year.
"And real GDP growth is now also expected to remain below potential for part of next year", the bank added.
The ECB defines area-wide growth potential this year as at 2.0-2.5 per cent.
