The European Central Bank said professional forecasters cut their estimates for the euro-area economy while raising their inflation expectations.
The economy will contract 0.5 percent this year, more than the 0.3 percent contraction anticipated three months ago, according to the ECB’s quarterly survey of professional forecasters published today. Forecasters lowered their estimate for 2013 growth to 0.3 percent from 0.6 percent and their projection for 2014 to 1.3 percent from 1.4 percent, the ECB said. Inflation is seen at 2.5 percent this year and 1.9 percent next year, up from 2.3 percent and 1.7 percent respectively.
European policy makers are trying to contain a sovereign debt crisis that has pushed five countries into seeking bailouts and taken the 17-nation euro economy to the brink of recession. The ECB said the economic outlook for the euro area remains “weak” as the debt crisis undermines confidence.
“It is essential for governments to support confidence by forcefully implementing the necessary steps to reduce both fiscal and structural imbalances and to proceed with financial sector restructuring,” the central bank said in its monthly bulletin today, which echoes President Mario Draghi’s Nov. 8 policy statement.
The ECB in September unveiled a new government bond purchasing program called Outright Monetary Transactions aimed at stemming surging borrowing costs in Spain and Italy. Yields have since fallen even though neither country has asked for the program to be activated.
Still, “we are ready to undertake OMTs, which will help to avoid extreme scenarios, thereby clearly reducing concerns about the materialization of destructive forces,” the ECB said.
Inflation risks are “broadly balanced” over the medium term and the inflation rate should fall below 2 percent, the ECB’s definition of price stability, “over the course of next year,” the ECB said. Risks to the economic outlook remain on the downside, it said.