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24th May 2019

Eurozone in danger of permanent stagnation, World Bank says

  • The eurozone is at risk of permanent stagnation, the World Bank has warned in a new report (Photo: World Bank Photo Collection)

The eurozone is in danger of sliding into permanent stagnation, the World Bank has warned in a new report.

“Weak consumption, anaemic investment and low inflation could feed on each other in a deflationary spiral,” across the single currency bloc, states the Global Economic Prospects report by the World Bank published on Wednesday (14 January).

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After growing by an estimated 2.6 percent in 2014, the global economy is projected to expand by 3 percent this year, far higher than the sluggish 1.1 percent forecast for the eurozone in 2015. The currency bloc saw a mere 0.8 percent growth rate in 2014.

The report adds that “recovery has been sputtering in the Euro Area and Japan as legacies of the financial crisis linger”.

“The global economy is still struggling to gain momentum as many high-income countries continue to grapple with the legacies of the global financial crisis and emerging economies are less dynamic than in the past,” said Kaushik Basu, the World Bank’s chief economist.

“Worryingly, the stalled recovery in some high-income economies and even some middle-income countries may be a symptom of deeper structural malaise,” he noted, adding that “as population growth has slowed in many countries, the pool of younger workers is smaller, putting strains on productivity.”

The bank believes that developing countries will be the strongest economic performers in 2015, benefiting from the recent slump in oil prices, a stronger US economy and low global interest rates.

It also asserts that the collapse in oil prices, which has seen the price fall from over $100 a barrel last July to below $50, should lead to an uptick in demand in most oil-importing countries.

The bank has also urged the European Central Bank (ECB) to embark on a money-creation programme to boost growth.

The ECB’s governing council is poised to launch its own government bond-buying programme - known as quantitative easing (QE) - and could do so as early as its next meeting on 22 January.

The Frankfurt-based bank’s president, Mario Draghi, has dropped several hints that the ECB will soon follow in the footsteps of the US Federal Reserve and the Bank of England hoping that injecting more cash into the economy will increase demand.

However, such a step is viewed by economists and market analysts as the ECB’s option of last resort, and several members of the ECB’s governing council, including German representatives Sabine Lautenschlager and Jens Wiedmann, remain deeply sceptical.

ECB bond-buying will 'not be a cure'

Nobody should mistake an injection of more cash into the eurozone economy for an economic cure, says one of the World Bank authors of a recent bleak report on the eurozone.

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