MNI INTERVIEW: ECB Growth Assumptions Over-Optimistic

The European Central Bank is using over-optimistic assumptions in its growth forecasts, leading it to downplay the danger of a hard landing if it keeps interest rates at present or higher levels, a leading forecaster and former senior Bank of France official told MNI.

While the ECB reduced its average 2024 growth forecast to 1% in its September macroeconomic projections, this figure still factored in growth in external demand of 3%, an assumption which is “quite optimistic given the current global situation, both in economic and geopolitical terms,” said Laurent Ferrara, head of the BdF’s International Macroeconomics Division until 2019, and now professor of International Economics at SKEMA Business School and chair of the International Institute of Forecasting’s macro forecasting section.

“The point is that the external demand addressed to the euro area is still high and has not been revised downwards for 2024,” he said. “This creates a risk, given China’s slowdown and rising geopolitical tensions.”

INCONSISTENCIES

As the ECB also kept its 2024 consumption growth forecast steady from June at 1.1%, this means the reduction in its outlook for overall internal demand is largely due to a year-on-year fall in investment of about 3.4%, Ferrara said in emailed responses to questions.

“This latter point could be considered as non-coherent with the upward revision of unemployment rate for 2024 from 6.4% in June to 6.7% in Sep. This is also not consistent with the upward revision in oil prices, leading to less purchasing power than expected in June,” he said.

“This can be viewed as a way to optimistically support GDP growth expectations, given that domestic demand is falling … Sustained GDP growth is needed to continue to increase rates, or at least to keep them high, and to manage a soft landing."