ECB rate rise ‘would impede recovery’

THE European Central Bank (ECB) risks making a “fundamental policy mistake” if it raises interest rates, a new report has warned.

The Ernst & Young Spring Eurozone Economic Forecast (EEF) says the recovery in Europe will be much slower than in Asia and the US and that ECB rate hikes “could potentially endanger the fragile economic recovery.”

Ireland will struggle over the next few years, but by the end of 2015 it will have the greatest economic growth in the eurozone at 4.7%, more than twice the average of 2%.

The report warns consumer demand in Ireland is likely to stay depressed until then and the economy will have to rely heavily on exports to drive the recovery.

The eurozone economy is growing at a much slower pace than expected at this stage of the recovery with GDP estimated to increase by only 1.5% this year.

Growth will be driven by exports, with world economic performance likely to remain robust, boosted by both emerging markets and the US.

Rapidly rising inflation is causing concerns, breaking the 2% barrier in December 2010, the first time since late 2008, and increasing further to 2.4% in February.

Marie Diron, senior economic adviser on the report, says Europe’s muted recovery over the next 12 months “could easily be blown off course by global economic events or an escalation of the eurozone debt crisis”.

Despite a pick-up in the global economy, Europe continues to face a challenging combination of concerns “over sovereign debt, political instability and rising prices.”

In Ireland’s case budget cuts and the poor state of the economy suggests “domestic demand is unlikely to recover for a number of years into the fiscal adjustment cycle,” she said.

The report estimates consumption in Ireland this year will fall by 4.5% — putting Ireland only ahead of Greece in terms of consumption. It adds that at 15% Ireland’s full-year 2011 unemployment forecast, will be 50% greater than the Eurozone average.

It warns the impact of this significantly weakened labour market will continue to have a drag effect on growth resulting in a fall in GDP of 2.3% in 2011 — almost three times greater than the 2010 decline of 0.8% — before we see a return to growth of 1.1% in 2012.

Diron said: “Ireland remains on track to return to strong growth in the medium term.