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Euro-Area Growth to Slow ‘Modestly’ in 2011, UniCredit Says

Euro-area economic growth in 2011 will slow “modestly” because of tightening fiscal policies, before improving next year on a recovery in investments and consumption, UniCredit SpA economists said.

“The modest economic slowdown is due to the deficit-cutting measures,” said Marco Valli, chief euro-region economist, in an interview in Milan. “The recovery is on track, and improving domestic demand prospects make us comfortable about its sustainability,” he said.

Gross domestic product for the region will expand 1.4 percent this year compared with 1.7 percent in 2010, the Milan-based bank said in its economic report. The German economy will expand 2.5 percent this year from 3.6 percent in 2010, according to the report.

“The European recovery will be mainly driven by Germany,” Valli said. The positive impact from exports is carrying over into domestic demand, which will contribute to more than half of the country’s GDP, he said.

The European Central Bank’s monetary policy will remain “accommodative,” said Valli, who doesn’t expect changes in European interest rates until the fourth quarter of 2011. “The ECB wants to avoid financial market instability so it will maintain measures to boost liquidity,” he said.

UniCredit forecasts a 25 basis-point increase in the ECB’s benchmark rate to 1.25 percent in the fourth quarter, while the rate may reach 2.25 percent at the end of 2012.

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