MercoPress. South Atlantic News Agency

ECB anticipates steep GDP fall and “stabilization phase” in 2010

Trichet calls on financial system to strengthen their capital bases

In a move which was widely expected, the European Central Bank (ECB) elected to keep interest rates for the euro zone on hold at 1% and announced that the planned purchase of 60 billion Euros in company bonds will commence in July.

At his usual press conference ECB president Jean Claude Trichet said that annual real GDP growth for the Euro area will range between -5.1% and -4.1% in 2009 and between -1.0% and 0.4% in 2010 in what he described as a “stabilization phase”.

“Compared with the March 2009 ECB staff macroeconomic projections, the ranges have been revised downwards, in particular for 2009. A substantial negative carry-over effect from the previous year and the very weak result for the first quarter of 2009 significantly contributed to this downward revision”, he said.

As to the economic outlook, Trichet said there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus under way and confidence may improve faster than expected. However a stronger impact on the real economy from the turmoil in financial markets and the intensification of protectionist pressures as well as a disorderly correction of global imbalances could impair recovery.

Regarding Euro-inflation the ECB is working on a projection between 0.1% and 0.5% in 2009, and for 2010 between 0.6% and 1.4%.

On the monetary side Trichet said that past reductions in key ECB rates have continued to be passed on to lending rates to both non-financial corporations and households and “the resulting improvement in financing conditions should provide ongoing support for economic activity in the period ahead. However, given the challenges which lie ahead, banks should take appropriate measures to further strengthen their capital bases and, where necessary, take full advantage of the government measures to support the financial sector, in particular as regards recapitalization”.

On fiscal policies Trichet warned that the latest projections by the EC point to a sharp increase in the Euro area general government deficit and debt ratios in 2009.

“The deficit ratio is projected to rise to 5.3% of GDP in 2009 and further to 6.5% in 2010, from 1.9% in 2008, with the debt ratio exceeding 80% of GDP in 2010”. A large majority of euro area countries are expected to exceed the 3% of GDP deficit reference value in 2009 and 2010. To ensure trust in the sustainability of public finances, an ambitious and credible adjustment effort will be required to return as soon as possible to sound fiscal positions, supported by a full application of the provisions of the Stability and Growth Pact”.