Eurozone recession fears on the rise

The ECB is expected to wait until the fourth quarter to raise its deposit rate, later than thought just a month ago, according to economists who also said the chances of a eurozone recession have grown.

Eurozone recession fears on the rise

The ECB is expected to wait until the fourth quarter to raise its deposit rate, later than thought just a month ago, according to economists who also said the chances of a eurozone recession have grown.

Economists, since last June, have predicted that after ending its asset-purchase programme in December, the ECB would follow with a rate rise in the third quarter of 2019, in line with the central bank’s guidance.

But a barrage of weak data - including news that Europe’s top economy, Germany, barely skirted a recession in the second half of last year - suggests growth has slowed, persuading economists to push forward that long-held forecast.

They also slashed their growth outlook for Germany, France and Italy compared with an October poll.

“While an outright recession will probably be avoided this year, a sharper-than-expected slowdown in the US or further escalation of the [US-China) trade war may be enough to cause a mild recession,” said Andrew Kenningham, chief eurozone economist at Capital Economics.

The ECB is now expected to raise its deposit rate, currently at -0.4%, to -0.2% in the fourth quarter and wait until early 2020 to raise its refinancing rate from zero to 0.2%.

The latest poll comes at a time of tightening financial conditions and with Britain’s scheduled exit from the EU imminent but no agreement within the UK government on how to proceed.

“Brexit, for the eurozone, is also an important risk — it might cause disruption in exports to the UK and that’s an additional factor that might weigh on growth,” said Peter Vanden Houte, chief eurozone economist at ING.

Only two respondents forecast the economy would shrink in 2020, but the median probability of recession in the next two years rose to 35% from 30% in December.

More than a third of economists polled gave a 40% chance or more of a recession. And on a like-for-like basis, out of 36 common contributors in January and December, nearly two-thirds raised their two-year recession probability.

Ten kept it at the same level. Only three lowered it.

The chance of a recession this year also rose to 25% from 20% in December.

But plenty remain unconvinced.

“You need certain preconditions for an economy to fall into a recession and I do not see them as of yet,” said Elwin de Groot, head of macro strategy at Rabobank.

ECB president Mario Draghi said on Tuesday the eurozone was not heading for a recession but needed support from the central bank as the slowdown could last longer than expected.

Reuters

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