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July 30, 2016

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Eurozone may get boost as expansion halves in Q2

IT seems that the strong start to the year was another false dawn for the eurozone economy and that the European Central Bank will have more to do in the months ahead to shore up growth.

New figures released yesterday confirmed that the eurozone, which is made up of 19 countries, suffered a sizeable slowdown in the second quarter of the year despite a number of stimulus measures that the ECB has thrown at it.

In its first estimate for the April-June period, Eurostat, the European Union’s statistics agency, said growth across the single currency bloc eased to a quarterly rate of 0.3 percent from the previous quarter’s 0.6 percent. The eurozone’s growth was equivalent to the 1.2 percent annual rate also reported yesterday for the United States.

The decrease was in line with market expectations, and the euro was steady at around US$1.11.

No explanation for the slowdown was provided in the report but analysts said growth was likely hurt by a moderation in the tailwinds that had helped in the first quarter. The sharp drop in oil prices has reversed slightly, meaning that the boon to households and businesses has largely played out. It was the same with the export-boosting depreciation of the euro, which has recently steadied.

The June 23 referendum in Britain may have also caused some uncertainty, prompting businesses to delay investment decisions. The evidence since Britain voted to leave the EU shows that Europe has brushed aside much of the uncertainty generated by the decision.

However, most forecasters think it will weigh to some degree on growth over the coming months, especially if the discussions around Brexit drag — few think annual growth will be anything much more than a modest 1.5 percent this year and next. As a result, many economists think the ECB will back a further stimulus package at its next policy meeting on September 8.

“The weakening in economic growth, together with the downward revisions in expectations for the outlook are setting the scene for more stimulus measures,” said Danae Kyriakopoulou, managing economist at the Centre for Economics and Business Research in London.

Kyriakopoulou estimates that the ECB is more likely to expand its bond-buying stimulus program rather than further cut its interest rates, which has the potential to undermine banks’ profitability.

The results of stress tests of EU banks were expected to show that many banks, particularly in Italy, are struggling with the super-low interest rates, which have fallen further since the Brexit vote.

The ECB earlier this year cut its main interest rate to zero and has pushed the rate it charges banks to park their cash at the central bank below zero.


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