Pessimism haunting eurozone economy

Pessimism is holding back the eurozone’s economic recovery as firms withhold investment, and reforms, particularly to boost productivity, are needed to shift long-term expectations, European Central Bank chief economist Peter Praet said.

The ECB’s job is to support demand as long as necessary to work through weak cyclical conditions, but its accommodative policies can only buy time for policymakers to address real institutional weakness, said Praet, who also sits on the ECB’s executive board.

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Eurozone growth is picking up pace but only slowly, a process the ECB has called “disappointing”. The IMF sees GDP expanding by just 1.6 per cent next year, up from an expected 1.5 percent this year, far below levels seen before the bloc’s double-dip recession.

“The economic environment is characterised by seeping pessimism about the prospects for long-term growth,” Praet said. “It holds back a stronger recovery, as uncertainty about the future can feed back into weaker investment today through expectations and confidence channels.”

Hoping to kick-start inflation and growth, the ECB launched a 1 trillion euro plus asset-buying programme earlier this year. But the results have been modest so far, especially as oil prices lower inflation and China’s slowdown reduces growth.