Euro zone growth seen tepid on divergence fears: Reuters poll

By Jonathan Cable

LONDON (BestGrowthStock) – Euro zone economic growth will be tepid over the next year and concerns about the divergent pace of recovery among member states will force the central bank to keep rates at record lows until end-2011, a Reuters poll found.

Median forecasts from the latest Reuters poll of 60 economists, taken over the past week, predict growth in the 16-nation bloc will be 1.6 percent this year — the highest in nearly two years of polling — but slow to 1.4 percent in 2011.

The pace of growth will slow from 0.4 percent expected for the third quarter to 0.3 percent in the current period. It is forecast to slow again to 0.2 percent in the first three months of 2011 before gradually picking up speed.

The quarterly forecasts are unchanged from a September poll.

While some of the 16 nations are witnessing a steady recovery others, such as Ireland and Greece, have slumped back into negative territory, and recent data suggests this gap may be getting wider.

“The recovery in the euro zone continues, but heterogeneity between countries is substantial,” said Ferdinand Fichtner at DIW Berlin.

The euro zone escaped from its deepest recession in post-war history in the third quarter of last year, after billions of euros were pumped into recovery measures, and relatively strong second-quarter growth of 1.0 percent surprised markets.

But with the euro bouncing to $1.41 on Thursday, its highest in more than eight months, European exports may become too expensive for markets also battling a return to recession.

Growth forecasts for the United States, which is seen growing an average 2.4 percent next year, were trimmed back by economists despite unanimous expectation of further stimulus by the Federal Reserve.

A return to recession in the euro zone continues to be seen as low, however, with economists giving an 18 percent chance of a double dip, down from 20 percent in last month’s poll and similar to the 15 percent likelihood seen for the United States.

“Ongoing gains in the economic confidence indicators until August suggest near-term risks of a double-dip for the euro area average remain very small,” said Juergen Michels at Citi.

ECB HOLDS ON

Interest rates are seen on hold at their record low for at least a year as the European Central Bank seeks to maintain the fragile recovery, in line with a poll two weeks ago.

The ECB cut interest rates to just 1.0 percent in May 2009 and a hike to 1.25 percent is not expected until the fourth quarter of next year, in line with a poll taken two weeks ago.

Inflation is seen averaging 1.5 percent this year before edging up to 1.6 percent in 2011 — firmly below the ECB’s two percent target ceiling, and unchanged from September’s survey.

“The ECB is unlikely to alter its policy stance any time soon given the divergences in economic performance across the region. Core inflation is running well below target thereby providing no urgency for a policy change,” said RBC analysts.

Unemployment in the bloc has held steady at 10 percent for the five months to August but economists expect it to peak at 10.1 percent in the last and current quarters, averaging 10.0 percent in 2010 and 9.9 percent in 2011.

(Polling by Bangalore Polling Unit, analysis by Ruby Cherian; Editing by Catherine Evans)

Euro zone growth seen tepid on divergence fears: Reuters poll