Economists at ratings agency Standard & Poor’s have taken a sharp set of scissors to their eurozone inflation forecasts.
Having earlier penciled in inflation of 1.1 per cent for this year, they are now looking for just 0.4 per cent. It now expects inflation to be running at 1.4 per cent next year, down a fraction from its previous forecast. Growth forecasts have also dropped, from 1.8 per cent for this year down to 1.5 per cent.
A nosedive in financial conditions at the start of the year has taken some wind out of the eurozone economy. The sudden decompression was a reaction to an underlying deterioration in the world’s major economies that was on the radar in the final months of 2015.
The sharp fall in equity prices expressed fears about slower growth in emerging markets, especially China, and possibly in the U.S. as early as the second half, with the eurozone’s recovery running on only a single engine–consumer demand.
In addition, we stress that central bank actions are having a diminishing impact on inflation and growth prospects, partly because some of the battles they’re trying to fight are beyond their reach (low commodity prices, erratic swings in emerging markets currencies), and partly because they lack “air support” from governments, such as structural reforms to boost competitiveness and the efficiency of labor markets.