ECB says growth risk in euro zone 'unusually high'

The European Central Bank (ECB) said risks to economic growth in the 15 countries sharing the euro are "unusually high" as the US housing-market slump slows a global expansion.

"As the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy," the Frankfurt-based ECB said in its monthly bulletin yesterday.

"While the economic fundamentals of the euro area are sound", risks to economic growth "lie on the downside".

The ECB left its benchmark interest rate at 4 per cent last week as the bank weighs the risk of slowing growth against accelerating inflation. The bank expects growth in the 15-nation region to slow to about 2 per cent this year from 2.6 per cent in 2007, according to its December forecasts, which will be revised in March.

Professional forecasters lowered their growth estimate to 1.8 per cent this year, down from 2.1 per cent in the last quarterly survey published in November. At the same time, the economists polled by the ECB increased their inflation forecast by half a percentage point to 2.5 per cent this year. "These inflation expectations reflect concerns about higher cost and wage pressures in 2008," the report said.

Separate data, published yesterday, showed that euro-zone growth halved in the final months of last year, confirming that a significant slowdown is under way.

Gross domestic product in the 15-country region expanded by 0.4 per cent in the fourth quarter, after 0.8 per cent growth in the previous three months, according to Eurostat, the EU's statistical office. Italy's economy is thought to have contracted. But the euro zone still grew faster than the 0.2 per cent fourth quarter growth reported by the US.

The ECB softened its hawkish tone last week in a move seen by observers as opening the door for possible cuts in euro-zone borrowing costs. However, Axel Weber, Germany's Bundesbank president, warned last night that financial markets' expectations about interest-rate cuts in the pipeline had not taken into account inflation dangers ahead.

Mr Weber was also upbeat about underlying growth prospects, especially in Germany, and shrugged off the impact of a possible sharp US slowdown. "The influence of the US economy on the euro zone has fallen in the past 10-15 years, while the domestic economy and the world economy are currently robust," he said. - (Financial Times service/Bloomberg)