Eurozone heading for another downturn, warns ECB vice-president

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The eurozone economy looks set for another downturn in the fourth quarter, while a recent pick-up in inflation is expected to persist in the coming months, the vice-president of the European Central Bank has warned.

In comments aimed at damping market expectations of an interest-rate cut in March, Luis de Guindos said in a speech in Madrid on Wednesday that the rapid pace of disinflation seen last year was likely to “slow down in 2024 and to pause temporarily at the beginning of the year”. Consumer price growth in the eurozone picked up from 2.4 per cent in November to 2.9 per cent in December.

He added that soft indicators pointed to an economic contraction in December. That would confirm “the possibility of a technical recession in the second half of 2023 and weak prospects for the near term”, he said.

His comments underline how the ECB faces an awkward decision when it meets on January 25 over how early to start cutting rates when the economic outlook is weak and inflation remains above its target of 2 per cent. While many economists predict eurozone inflation will hit that target this year, the central bank is not forecasting this until the third quarter of 2025.

The ECB’s cautious view on the pace of disinflation was underlined by its executive board member Isabel Schnabel, who wrote in a Q&A session on social media site X: “It is too early to discuss rate cuts.”

To be sure that inflation would return sustainably to the ECB’s target “requires additional data confirming the disinflationary process,” she said, adding: “Geopolitical tensions are one of the upside risks to inflation as they could drive up energy prices or freight costs. That’s why we need to remain vigilant.”

De Guindos did not say what a likely recession would mean for monetary policy — sticking to the ECB’s oft-repeated line that “future decisions…