Eurozone economy too weak to support growth

Though the recovery in the European economy appears to have picked up some speed since the beginning of this year, the growth is too weak to support a sustainable recovery, as the deflation risk is mounting and rooted problems remain unsolved, said British experts.

According to Iran Daily, the recent Eurozone data suggest that the worst is over, with GDP expectations for this year and the next being pushed higher.
However, “our economists have long been of the view that the growth recovery in the Eurozone will not be strong enough to reverse the dis-inflation trend”, said HSBC Global Research in an analysis report, Xinhua reported.
The inflation rate in the Eurozone dropped to a mere 0.5 percent in March, the lowest level in the past four years, showed data released by Eurostat, the statistical office of the European Union.
The figure is not only far below the European Central Bank (ECB)’s inflation target of 2 percent, but also approaching to the edge of deflation.
HSBC expects that the ECB will have to resort to further stimulus in the coming months.
Fitch Ratings, a London-based international credit rating agency, warned that it sees deflation as a greater risk in the eurozone.
It is unlikely that experimenting with mildly negative deposit rates would be transmitted into a meaningful stimulus to the real economy, said Fitch in a note.
The eventual quantitative easing policy would still face potential political and legal challenges given the prohibition on monetary financing under the Treaty of the European Union, added Fitch.
The Eurozone now looks set to expand by 1 percent or more this year, a significant improvement on last year’s contraction, and even some of the peripheral economies may return to growth, said Capital Economics in its European Economic Outlook report.
But structural problems in each member-state are undermining the growth prospect, the report said.
In the core countries of the eurozone, Germany’s economy appears to have picked up speed, but there are still few signs that cautious consumers are about to join in. France is set for a grinding recovery that will only slowly erode the country’s high unemployment and public debt load, said the London-based economic research company.
Among peripheral countries of the economic bloc, Italy has finally started growing again, but given the lack of progress towards structural reforms, public debt dynamics remain very precarious.
In Spain, high levels of private debt will ensure that domestic demand growth is sluggish at best. Greece may return to growth this year, while Portugal’s surprisingly strong upturn may lose some momentum, analyzed Capital Economics.
Greece successfully returned to the international market after a four-year exile, with a bond sale of €3 billion (about $4.2 billion).
The company expects a mere 1 percent expansion of the eurozone’s GDP this year, and such growth will not be enough to erode the spare capacity in the economy and relieve the downward pressure on inflation.