ECB: Europe is even worse off than we thought

The ECB now forecast a 0.3 per cent contraction in eurozone economies this year, even worse than its previous forecast of -0.2 per cent.

The eurozone debt crisis has had a big impact on the credit risks of companies in the area, with Italian firms hit particularly hard, the bank said in its monthly report released today.

“The overall increase in uncertainty was accompanied by a sharp deterioration in markets’ assessments of firms’ credit risk, as measured, for instance, by expected default frequencies,” the ECB said.

“Across the larger euro area countries, this rise was particularly pronounced for Italian firms, while it was rather subdued for Dutch and German firms.”

Next year? More bad news

The gloomy forecast comes a day after the Bank of England said it expected zero growth in 2012 and that it would take an “Olympic” effort and hard work to battle the eurozone crisis, domestic deficit-cutting and tight credit conditions

Next year is not expected to be much brighter in Europe. The ECB expects the growth of 0.6 per cent in 2013, not the 1 per cent it had previously predicted, the bank said.

The ECB forecast is reached by surveying 50 economists and academics.

Inflation

‘The recovery in the global economy continues to proceed, albeit unevenly, gradually and subject to “considerable fragilities,” the ECB said.

“Having moderated in the second quarter of 2012, weak global growth momentum appears to have continued into the third quarter of the year, particularly in Europe.”

While the bank cuts its growth forecasts, it reiterated the bank’s expectations for inflation in the eurozone in 2012, potentially creating room for the central bank to cut interest rates. The ECB cut its main interest rate by 0.25 percentage points to a record low of 0.75 per cent in July.

Inflation in the UK has fallen substantially since September 2011, when it hit a three-year peak of 5.2 per cent. It dropped to 2.4 per cent in June and inflation is forecast to fall again by the end of 2012, averaging below 2 per cent from late 2013 onward. The euro zone debt crisis remained the key risk for Britain’s economy, however.

There were no indications of new policy moves from the ECB in the report.