Growth in the European economy is slowing down faster than forecast, European Central Bank Executive Board member Lorenzo Bini Smaghi said.
Bini Smaghi told Il Messaggero newspaper coming quarters might witness a “phase of protracted weakness” as risks to growth were materialising. “The European economy is slowing down, more rapidly than forecast, due to a number of factors, first of all past months’ increase in the prices of raw materials, which cut into purchasing power,” Bini Smaghi was quoted as saying.
He said the low-growth phase would last until the economy adjusted to higher and more volatile commodity prices. But slowing productivity amid a weakening economy warranted caution against inflation.
“With the first signs of a slowdown, one registers a fall in productivity. Unit costs rise and this translates into more persistent inflation. This is the reason why one cannot lower one’s guard in fighting inflation,” he said.
The ECB left key interest rates unchanged at 4.25 per cent last week and insisted inflation was still its key fear even though risks to growth were taking hold.
“Many indicators point to a worsening in growth expectations. There are many risks, which we flagged in the past, and which are partly materialising. We could see a phase of protracted weakness in coming quarters,” Bini Smaghi said.
Meanwhile, inflation in the euro zone is not likely to drop back to the ECB’s target of just below two per cent either this year or next.