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Research Euroland

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Euroland: Financial crisis killing off growth

Thu, Oct 9 2008, 15:19 GMT
by Søren Dijohn

Danske Bank A/S

• • Since the publication of our September forecast, the financial crisis has hit the Euroland economy. The impact on economic activity is proving dire. Based on historical experience we expect the economy to stall over the coming quarters. We now forecast Euroland GDP to stagnate in 2009 (0.0% GDP growth). Thus we have revised down our 0.7% GDP growth forecast as companies shed inventories and cut down fixed investments in the light of slow domestic and foreign demand and limits to credit. For 2008 we revise down our growth forecast 0.2%-point from 1.3% to 1.1%. 

• • The global slowdown is having a profound effect on commodity prices. Consequently we have lowered our inflation forecast for 2008 from 3.6% to 3.4% and for 2009 from 2.6% to 2.0%. By mid 2009 inflation is expected to be around 1.5% mainly due to the negative contribution to inflation from energy prices. Thus inflation is on a clearly downward path until mid 2009. From then a gradual pick up is foreseen, albeit inflation is expected to remain below the ECB's target until end 2009. 

• • Following the globally-coordinated central bank rate cut, we expect the ECB to deliver more rate cuts over the coming months. We are looking for the ECB to cut rates in December 2008 and again in February and April 2009, each time by 25bp, meaning that the ECB policy rate will be 3.00% by summer 2009. 

• • Uncertainty surrounding our forecasts on growth, inflation and the ECB is unusually high, as much depends on developments in financial markets. Furthermore, historical data in Euroland on how financial sector stress affects the economy is relatively limited, and the size of the impact is highly uncertain.

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Published on  Thu, Oct 9 2008, 15:23 GMT