Euro zone to contract in 2013, dashing Draghi's optimism - Reuters poll

LONDON Wed Jan 23, 2013 4:34pm GMT

Related Topics

LONDON (Reuters) - The euro zone's ravaged economy will contract again this year, challenging the European Central Bank's claims of a turnaround in the bloc's fortunes, according to the latest Reuters poll of forecasters on Wednesday.

While ECB President Mario Draghi's promise to do "whatever it takes" to save the euro has triggered a rally in European stock markets and eased the sovereign debt crisis through a plunge in borrowing costs, the economy has yet to heal.

"The euro zone stepped back from the abyss in 2012 and an upturn in world trade should provide some support in 2013," said Janet Henry, chief European economist at HSBC. "The growth outlook, nonetheless, remains very weak."

Draghi is taking an optimistic view, declaring earlier this month that the euro zone economy would recover later in 2013 and that there was now a "positive contagion" effect in play.

Europe's top central banker cited falling bond yields, rising stock markets and historically low volatility as evidence for this, causing several forecasters to ditch expectations for an imminent cut in euro zone interest rates.

But these economists, who have scant evidence of an improvement in economic data to go on, are not convinced by the ECB's upbeat view.

More than a third of contributors to both the January and December polls, 24 of 63, downgraded their euro zone growth forecasts for this year. Only two upgraded them and 37 left them unchanged.

Medians from the latest survey of 70 economists, taken over the past week, predicted stagnation this quarter and only 0.1 percent growth in the next one, revised down from last month's prediction for 0.2 percent growth.

Economists expect a full-year contraction of 0.1 percent in 2013, the worst since Reuters began polling on the outlook last January, and 1.0 percent growth across 2014 - a sharp revision down from the 1.2 percent expansion predicted last month.

Germany, the euro zone's largest economy, will escape recession by returning to minimal growth this quarter after contracting in the last three months of 2012. But the poll gave only a 20 percent of a recession in Germany. <ECILT/DE>

France, the bloc's second biggest economy, has sunk into a short-lived recession from which it will begin to emerge in the spring, but the recovery that follows will be long and painful, as jobless rolls surge to an all-time high. <ECILT/FR>

Spain, Greece and Portugal face a tougher 2013 than previously thought, while the outlook for growth in Ireland, the only bright spot among the euro zone's most vulnerable economies, was cut for the first time in nearly a year, according to a Reuters poll published last week.

BUT EURO REMAINS STRONG

The euro hit an 11-month high against the dollar earlier this month, making the bloc's exports less attractive to buyers, with the greenback dogged by uncertainty over fiscal policy in the first half of the year.

Expectations in the poll are for the United States economy to plod along at a modest growth rate in 2013. Underpinning the world's biggest economy will be the Federal Reserve's latest extraordinary supportive measures. <ECILT/US>

In contrast, the ECB's hands had been tied by inflation running well above its two percent target ceiling. But the poll predicts that it will hold below there from the April quarter through to at least July 2014.

Inflation is seen averaging 2.0 percent this quarter and then falling to 1.9 percent next. It will dip further to 1.8 percent in the final months of this year.

Despite this, the ECB probably won't cut rates from their record low of 0.75 percent. Economists were more decisive about the ECB holding off than in a series of recent polls which have seen expectations for a rate cut flip-flopping on a knife-edge.

Only 15 of 73 economists expect a rate cut by March compared with 35 of 73 economists in a poll taken three weeks ago. Only 24 of 73 economists now see lower rates by the end of June compared with 37 of 72 previously.

"The real economy will improve, given the more favorable conditions in financial markets. As a result, we expect the ECB to remain on hold this year," said Greg Fuzesi at JPMorgan.

Euro zone unemployment, which reached a new high of 11.8 percent in November, is likely to reach 12.1 percent later this year and won't start to fall until early 2014.

In some periphery countries over one-in-four people are out of work while youth unemployment is running at over 50 percent.

(Polling and analysis by Ruby Cherian and Somya Gupta; Editing by Toby Chopra)

FILED UNDER: