Euro zone facing weak growth, possible recession, ECB’s de Guindos says

European Central Bank (ECB) Vice-President Luis de Guindos arrives at the Presidential Palace for a meeting with Cyprus President Nikos Christodoulides in Nicosia, Cyprus, Oct 4, 2023. REUTERS/Yiannis Kourtoglou/File photo

FRANKFURT  —The euro zone may have been in recession last quarter and prospects remain weak, European Central Bank Vice President Luis de Guindos said on Wednesday, adding that the recent rapid slowdown in inflation is likely to take a pause now.

Euro zone growth has been hovering on either size of zero for most of 2023 and only a mild pick up is seen this year, helping to cool inflation, which has overshot the ECB’s target for years and forced policymakers to raise interest rates to record highs last year.

“Soft indicators point to an economic contraction in December too, confirming the possibility of a technical recession in the second half of 2023 and weak prospects for the near term,” de Guindos said in Madrid.

READ: Euro zone likely in recession, PMI surveys show

“Incoming data indicate that the future remains uncertain, and the prospects tilted to the downside,” he said.

De Guindos said that economic weakness was broad-based, with construction and manufacturing hit particularly hard and services likely to follow in the coming months.

Five rate cuts seen

On policy, de Guindos offered no new message, merely repeating the ECB’s guidance that a 4-percent deposit rate, maintained for a “sufficiently long duration”, will help cut price growth back to the ECB’s 2 percent target.

Investors see at least five rate cuts this year with the first move coming in March or April, a timeline several policymakers have called excessive given lingering price pressures.

READ: Euro zone inflation tumbles, pitting ECB against markets

Inflation fell rapidly through most of 2023 but jumped back to 2.9 percent last month, mostly on technical factors, and may hold around this level for some time.

“Positive energy base effects will kick in and energy-related compensatory measures are set to expire, leading to a transitory pick-up in inflation,” de Guindos said.

ECB projections see inflation back at target only next year but a host of private forecasters disagree and think the ECB is underestimating disinflation much the same way it missed inflation on the way up.