Wednesday 20 February 2019

EU Commission and Bank of England slash forecasts for growth

EU downgrades Irish forecast to 4.1pc, Iseq and European shares hit

European Central Bank (ECB) President Mario Draghi
European Central Bank (ECB) President Mario Draghi

David Chance

The European Commission made dramatic cuts to its forecasts for the euro area yesterday.

The downgrades were especially sharp for Italy, the bloc's third-largest economy which is already struggling with the budget confines of the Stability and Growth Pact, and for Germany, the economic powerhouse of Europe which has ridden a post-recession export boom that has now come to an abrupt halt.

Ireland's forecast was also cut, with the Commission projecting a 4.1pc expansion this year compared to a November forecast of 4.5pc.

European shares fell yesterday after the downgrades, with €1.8bn wiped off the Iseq, which fell 2.14pc.

Still, Ireland is predicted to be the joint second fastest growing economy in the eurozone, alongside Slovakia.

However economists have repeatedly questioned the extent to which Ireland's GDP figures reflect the reality of the economy given the large multinational presence here.

"The economic outlook remains clouded by uncertainty. This relates primarily to the terms of the UK's withdrawal from the EU. As a highly open economy, Ireland is also particularly exposed to changes in the international taxation and trade environment," the Commission said.

"The huge impact of the often unpredictable activities of multinationals, could drive headline growth either up or down."

While the Commission was cutting its outlook for the eurozone this year to just 1.3pc from 1.9pc, the Governor of the Bank of England, Mark Carney, was sounding a harsh warning over Brexit.

"The fog of Brexit is causing short-term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy - tensions for business," Mr Carney told a press conference after the bank's regular monetary policy meeting.

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The bank cut its forecast for UK economic growth to 1.2pc from 1.7pc, its biggest downgrade since the Brexit referendum in June 2016.

Mr Carney, who extended his term as Governor to see the economy over the Brexit period, was asked whether he regrets that decision when he wakes up in the morning.

"I don't wake up in the morning any more ... I wake up in the middle of the night," he fired back at a press conference after the rate decision.

The decline in growth expectations fed through into interest rate expectations.

The Bank of England's path appeared to follow that of the US Federal Reserve by leaving interest rates on hold, sounding more dovish and hinting that fewer rate hikes are coming.

The pound initially fell on the Bank's outlook for the economy, but rallied strongly during the press conference which was a little more upbeat than the report.

While the European Central Bank has yet to come out and say that its plans to start raising interest rates after autumn of this year are being reconsidered, ECB president Mario Draghi has admitted that risks are tilted to the downside.

Irish Independent

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