ECB cuts eurozone growth outlook

Last updated 09:30 07/12/2012

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The European Central Bank (ECB) has warned of another gloomy year for the 17 European Union countries that use the euro, cutting its forecast for economic growth next year from plus 0.5 per cent to minus 0.3 per cent.

Even so, the bank left rates unchanged at its meeting on Thursday, and ECB head Mario Draghi gave little sign he was leaning toward any more cuts to stimulate growth.

The bank's 22-member governing council kept its benchmark refinancing rate unchanged at 0.75 per cent. The rate determines what private-sector banks are charged for borrowing from the ECB, and, through that, the rates banks set for businesses and consumers.

Draghi saw "downside risk to the economic outlook" and said "weak activity is expected to extend into next year," with a gradual recovery later next year. The bank's minus 0.3 per cent outlook is the midpoint of the forecast rate of between minus 0.9 per cent and plus 0.3 per cent.

The ECB's revised forecasts come as the eurozone's economy is caught in a recession - having shrunk 0.1 per cent in the third quarter after a 0.2 per cent fall in the previous three months. It is expected to contract again in the last three months of the year. A recession is often defined as two quarters of negative growth in a row.

Growth is being held back across the eurozone as governments slash spending and raise taxes. They are trying to reduce debt piled up from overspending, in the case of Greece, or from real estate bubbles and banking crises in Spain and Ireland. Greece, Portugal, Ireland and tiny Cyprus have already needed bailouts, while Italy and Spain, the eurozone's third- and fourth-largest economies, teetered on the edge of needing help this summer.

Analysts saw the slashed forecasts as confirmation of more tough times to come for the eurozone.

"This is something that we have been flagging for some time, namely that the eurozone may be headed for a 'lost decade,"' said Marie Diron, a senior economic adviser at Ernst & Young.

A rate reduction by the ECB in theory could stimulate the eurozone's economy by making it easier to borrow, spend and invest. But rates are already low, and borrowing remains weak.

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- AP

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