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Eurozone Growth Forecasts Cut

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Eurozone Growth Forecasts Cut

Eurostat has released the final March figure for the Producer Price Index of the Eurozone, this has ticked up very slightly on the previous month. Year on year the index is now reading at -1.6% which represents a minor improvement on the February number of -1.7%, market consensus estimates supported no change from this -1.7% figure. Month on month the index remains at -0.2% as anticipated.

On the day that Portugal becomes the latest country to exit the EU/IMF bailout program, the European Commission has taken the opportunity to scale back it’s growth forecasts for the Eurozone. The Commission has stated that it expects growth within the 18 nation single currency bloc to be 1.7% in 2015, this is a pullback from the 1.8% it forecasting just last month. Importantly the Commission has also reduced it’s inflation predictions for the Eurozone, citing 1.2% price growth in 2015 and just 0.8% price inflation for this year.

As the European Central Bank (ECB) prepares later this week for one of it’s most crucial meetings since the recovery began there is mounting pressure for concrete action to be take on the introduction of further monetary stimulus. Inflation is perilously low within the overall Eurozone bloc of countries, naturally there is a growing fear of deflation taking hold and many of the individual member states are already reporting flat or even negative price growth.

The real issue however is not the obvious threat of deflation but the more creeping situation of very low inflation for a prolonged period of time, this in the absence of meaningful growth can lead to a stagflationary situation. Economically the unemployment consequences of stagnation could be devastating to a Eurozone that is already battling with record unemployment levels. This is why the ECB’s wait and see approach cannot continue, it is this very wait and see approach that is contributing to the problem.

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