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15th Aug 2020

ECB bond-buying will 'not be a cure'

  • China is seeing strong growth as the eurozone stutters (Photo: Trey Ratcliff)

The World Bank is the latest subscriber to the consensus that the eurozone will retain its status as one of the world economy’s laggards in 2015.

In its biannual Global Economic Prospects report published last week, the Washington-based bank projected that the global economy will expand by 3 percent this year, compared to an estimated 2.6 percent in 2014.

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This is down from the 3.5 percent rate for 2015 it forecast last June, which the bank attributes to continued weakness in Europe and Japan.

"The global economy is running on a single engine, ... the American one," World Bank chief economist Kaushik Basu told reporters at a press conference on Tuesday (January 13). "This does not make for a rosy outlook for the world."

The Bank says that the world economy cannot rely solely on the US - which has a projected growth rate of 3.2 percent in 2015.

The European and Japanese economies are forecast to grow by little more than 1 percent in 2015, while Russia, whose rouble has tanked by 50 percent against the dollar over the past three months, is set to see its economy contract by nearly 3 percent.

Speaking to EUobserver, Franziska Ohnsorge, the lead author of the Economic Prospects report, expressed surprise that “investment and confidence is so much weaker than we forecast.”

She contends that the eurozone is so weak that any windfall from the slump in oil prices is likely to be minimal, even for Europe’s predominantly oil-importing countries.

“Normally we would expect an oil slump to be good for growth,” she says, noting that recent economic history would suggest that the falling oil price, which has dropped from over $100 per barrel to under $50 in six months, should add 0.5 percent to the world economy.

However, such is the weakness of consumer confidence in Europe that most of the windfall from lower energy prices will simply be saved by most households.

All eyes will be on European Central Bank (ECB) this Thursday, when ECB president Mario Draghi is widely expected to unveil the bank’s own money printing exercise - a government bond-buying programme usually referred to as quantitative easing (QE).

Ohnsorge agrees that QE is needed, and would lead to a weaker euro that should help the bloc’s exports, but is clear that nobody should mistake an injection of more cash into the eurozone economy for an economic cure.

“We do recommend QE in general, but it is just a supplementary measure. It is just a necessary breathing exercise,” says Ohnsorge.

The World Bank takes a similar stance to that of Draghi’s ECB on what is really needed to drive a eurozone recovery - growth enhancing structural reforms.

However, despite eurozone prices falling by 0.2 percent in December, the first time a negative inflation rate has been posted since 2009, the bank is relatively sanguine about the threat of deflation.

“We could see several months of negative inflation ... but this would not be that big a problem,” Ohnsorge says.

The real risk, she says, is that long-term inflation expectations becoming "de-anchored" from the 2 percent rate targeted by the ECB.

But while the eurozone faces another bleak year, the economic party is going on elsewhere.

Developing countries particularly in Sub-Saharan Africa continue to catch up on their rich European counterparts.

Sub-Saharan Africa will record a 4.6 percent growth rate, while south-east Asian powerhouses China and India will see their economies expand by between 6.5 and 7 percent.

In other words, there is good economic news in the world; but you have to look outside the eurozone to find it.

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