Mario Draghi ECB president optimistic about future of euro zone economy

Mario Draghi, President of the European Central Bank(ECB) gave a positive optimistic outlook for the euro zone economy during a press conference in Cyprus.

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The euro zone economy is receiving a stimulus from lower prices for oil. The fall in the value of the Euro also improves the situation for exporters. Finally, the ECB is introducing a policy of quantitative easing(QE) through the purchase of sovereign bonds. This should improve liquidity and stimulate the economy. The Bank will begin the bond buying program on March 9.

The ECB will purchase $66.48 billion in bonds each month until September 2016. The program could continue beyond that date if the goal of raising inflation to around the two percent level is not reached. ECB economists provided support for Draghi's optimism with predictions of 1.5 percent growth in 2015,1.9 percent in 2016 and just over 2 percent in 2017. Although prices actually fell in January and February of this year, they are expected to rise by 1.5 percent next year, and 1.8 percent in 2017. In total, the ECB plans to buy $1.2 trillion in bonds. Draghi claims that the program will result in the euro zone's fastest growth rate since 2007 and boost inflation.

There was no good news for Greece in Draghi's remarks. There was no waiver of the requirements for being eligible to participate in the bond buying program for Greece. This will make financing for the Greek government a continual struggle since it will need to issue more treasury bills that will have a high interest rate. As one article described the situation in a rather weird metaphor: In short it may be about to rain money in Europe, but Athens is holding an umbrella.However, Greece does not have enough sovereignty to throw away the umbrella. It must get permission from its creditors to do so.

In an earlier speech before the European Parliament in late February Draghi noted that unless countries gave up some of their independence and created more institutions governing the entire zone its future would be at risk. Draghi complained that the euro zone had not yet become a real monetary union:“In the medium to longer term, we need to move from a system of rules and guidelines for national economic policy making to a system of further sovereignty sharing within common institutions so as to strengthen our economic policy governance. A common rule is only as strong as the common institution that can enforce it.”

Draghi said that if Greece showed that it was willing to stick by the conditions of the bailout, the ECB would again accept Greek government bonds as collateral. Draghi left the parliament even before debate was finished to the annoyance of a number legislators. Sceptics claim that improving economic conditions may have more to do with the much lower cost of oil and the lower value of the euro that has stimulated exports:Bundesbank President Jens Weidmann, said the euro-zone economy would enjoy an uplift anyway after oil prices fell by half, the euro tumbled, and stimulus in recent months such as interest-rate cuts take effect.

International Monetary Fund lowers global economic growth forecast

- The International Monetary Fund(IMF) reduced its projected global growth number for next year from 4 percent in July to 3.8 percent now. The downgrade resulted from continued economic weakness in the Eurozone and a slowdown in several emerging markets.

The 3.8 percent growth rate is still better than the estimated 3.3 percent growth estimated for this year.The IMF claimed there is a one in three chance that the Eurozone could actually enter a recession. Growth forecasts were reduced for the three largest European economies, Germany, France and Italy. Italy will be entering its third year in recession. Lower growth rates are also predicted for Japan, Russia, and Brazil. Brazil is expected to grow only 1.4 percent next year down from the 2.0 percent predicted in July. However, there are signs of strengthening in the world's largest economy the United States and gains as well in Canada and Mexico.
 After a slow growth rate in the first part of 2014 the IMF upgraded US growth prospects to 2.2 percent for 2014. Job growth numbers have been strong and the unemployment rate has dropped to 5.9 percent. 248,000 jobs were added in September. Canada is predicted to grow by 2.3 per cent this year and 2.4 percent in 2015.
 IMF economic growth forecasts have tended to be overly optimistic. In the last four years they have repeatedly been forced to downgrade their growth forecasts.The IMF Managing Director Christine Lagarde warned that the recovery was "brittle, uneven and beset by risks". The IMF report also suggested that the global economy might never return to the high growth rates prior to the financial crisis. Details of the IMF predictions and graphs can be found at this Guardian article..
 While China's growth is predicted to be 7.4 percent this year, by sometime in 2016 it is expected to be down to 6.5 percent. While many countries would envy such growth rates, they are well down from the over ten percent average yearly growth rate before the financial crisis.
 Russia's growth rate will be hit by sanctions imposed by the US and EU. The ruble's value has plunged as investment dries up and capital flees. The IMF predictions assume that the geopolitical tensions in such places as Iraq and the Ukraine will be less. The report noted that "the projected pickup in growth may again fail to materialize or fall short of expectations" and stress that there were increasing downside risks. The downside risks included high levels of public and private debt in many countries.

Europe faces new worries with rise in oil prices

Just as debt anxiety in Europe may be easing slightly the sharp rise in the price of oil creates new worries. If the prices rise too high they could very well impede any recovery in the EU economy.

Brent oil has risen a full 20 per cent since the middle of last December. Much of the rise is due to worry about supplies particularly since Iranian oil will no longer be imported. The Brent price set an all time high this week.

Although there has been a sharp rise in prices economists say that it is still not so high as to curb any recovery. Price now is about 123 dollars a barrel. This is below the cost last April of 127 dollars and far below the record high of 147 dollars a barrel in 2008.

Still the upward trend worries many. Julian Callow an economist said:"This comes at a difficult time for the euro area economy, which I would still characterize as being in a state of mild recession despite one or two more promising signs," "If we were to see a rapid, sudden escalation in the oil price, then for sure it would be a factor that would lead us to be revising down our projections for euro area growth and, if sustained, could make a mild recession turn into something more serious,"

He said that prices were already approaching the danger zone. Another analyst Andrew Milligan said that another 10 to 15 dollars rise a barrel was not too worrisome but if the price approaches 140 dollars a barrel and stays there this would threaten economic growth and profits for many firms. For much more see the full BNN article.

Euro currency zone economy to shrink in 2012

The EU executive warned that the EU zone economy will decline for the second time in three years. The executive warned that the euro currency area has yet to break the debt cycle in some countries.

Oli Rehn the EU Economic and Monetary Affairs Commission said however:"Recent developments in survey data suggest that the expected slowdown will be rather mild and temporary," "But the turnaround of the trend still needs to be confirmed in the coming months and it essentially depends on the policy decisions to be taken,"

The Commission report predicted that output in the 17 countries sharing the euro currency is likely to contract .3 per cent in 2012. Earlier growth was predicted of .5 per cent. Economic growth in the larger 27 member EU is expected to be flat this year.

The Euro zone's last recession was much more severe with the economy contracting by 4.3 per cent in 2009. High debts, reduced investor confidence and a rise in unemployment have killed off the recovery. Many economists predict growth only in 2013.

The IMF view is slightly more pessimistic than the Commission report. The IMF predicts production will decline by .5 per cent this year with a modest recovery in the last few months of 2012. If debt issues are not resolved the situation could be even worse. For more see this BNN article.