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European Commission Updated Projections

Written by A Forex View From Afar on Monday, January 19, 2009

The European Commission, the institute responsible for the European legislation and its implementation, today cut the Euro-area’s growth forecast to -1.9% for 2009.

The European Commission’s forecast is the grimmest report from a public institution. The previous forecast from the same institute, issued just two months ago, in November, said the economy would expand by 0.1% in 2009. The current estimates released by the ECB, known as the staff projections, points to a 0.5% contraction in the Euro-area in 2009. However, as Mr. Trichet said during last week’s press conference the staff projections are going to be drastically lowered in March.

The European Commission also said that the Q4 GDP growth is expected to be as low as -1.5%. Even though this is a very negative and worrying number, it looks like it is surprisingly close to the other three major economies’ forecasts. The Q4 GDP numbers for Japan, U.S. and U.K. are expected to range from -1.5% to -2.0%, the worst in the last few decades in some cases.

Furthermore, the ECB’s Governing Council member George Provopoulos, said in a interview that it is off the mark to expect the bank to cut interest rates to 1%, or below. In the last few weeks, the ECB members have repeatedly said that the central bank would try, at all costs, to avoid reducing the overnight rate too much, something that would create a liquidity trap. However, George Provopoulos, who is also the Chairman of the Bank of Greece, did not exclude further rate cuts in the future, and neither did Mr. Trichet in his interest rate speech, last week. It should also be noted that the ECB was focusing on inflation in July, and only a few weeks later the bank conducted its first rate cut.

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