Economic expansion has almost ground to a halt in the eurozone, and it faces further “high costs” as policymakers battle record inflation, European Central Bank (ECB) executive board member Fabio Panetta said.
In the starkest warning yet from the ECB of the damage being wrought by the war in Ukraine, Panetta told Italy’s La Stampa newspaper that the region’s economy is “de facto stagnating.”
“This makes the choices facing the ECB more complicated, as a monetary tightening aimed at containing inflation would end up hampering growth that is already weakening,” he said.
Photo: Reuters
The comments strike a far more cautious note than some of Panetta’s more hawkish ECB colleagues, who have raised the possibility of raising interest rates from all-time lows starting in July to combat soaring prices.
Asked about that prospect, Panetta said that “it does not make much of a difference whether it is two or three months earlier or later,” although he added that under current circumstances, “negative rates and net asset purchases may no longer be necessary.”
The ECB’s next rate meetings are on June 8-9 and July 20-21.
Panetta said that inflation is being fanned by international factors that monetary policy can only address in a limited manner, which means the ECB “cannot tame inflation on our own without causing high costs for the economy.”
The biggest eurozone members are already suffering. Highlighting the malaise, German factory orders plunged in March, falling more than anticipated after Russia’s invasion darkened the prospects for Europe’s top economy.
“It would be imprudent to act without having first seen the hard numbers on GDP for the second quarter and to discuss further measures without a full understanding of how the economy could develop over the following month,” Panetta said.
Second-quarter GDP data are not officially published until July 29, although indicators on how the economy is doing are available earlier.
Evidence is starting to trickle in that some consumers are struggling to deal with tighter budgets.
While many consumer-goods companies in Europe have been able to pass on higher costs to consumers, Heineken NV chief executive officer Dolf van den Brink has said that higher energy bills might lead consumers to pull back on other expenses, such as beer.
Zalando SE, Europe’s biggest online clothing retailer, also said it is seeing the first cracks in consumer spending as rising expenses lead shoppers to choose entry prices over mid-market clothing — but more well-heeled shoppers are still opting for pricier clothes.
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