Euro economy ‘is out of freefall’

The eurozone economy has seen the worst of the recession and is “out of freefall”, the president of the European Central Bank has said.

Jean-Claude Trichet added that the region was “stabilising” and was “expected to recover at a gradual pace” but that “uncertainty remains high”.

His comments came after the ECB kept interest rates on hold at 1%.

Analysts expect the rate to stay low for some time, given that no rapid economic growth is expected.

Record lows

Earlier this week, revised figures showed eurozone economic activity shrank by 0.2% between April and June – worse than originally thought.

The area is expected to emerge from recession in the third quarter. Some countries including France and Germany have already returned to growth.

Revised figures show Greece, Poland, Portugal and the Czech Republic have now also emerged from recession.

The UK’s central bank also left its key interest rate unchanged on Thursday, holding it at the record low of 0.5%. The UK’s economy is lagging well behind the European Union as a whole, with figures showing economy contracted by 0.6% in the second quarter.

Earlier this week, Australia, which has so far avoided recession, became the first major economy to raise rates since the onset of the financial crisis.

Deficit concern

The ECB’s rate, its lowest in the Bank’s 10-year history, was “appropriate”, Mr Trichet said.

“We have signs of stabilization. We are out of the free-fall,” he said. But he added: “We have to be cautious. We have to be prudent.”

Analysts expect the rate for the eurozone to stay low for some time. The International Monetary Fund forecasts GDP will expand by just 0.3% in the 16-nation eurozone next year.

“We continue to believe the ECB remains very comfortable with notions of keeping the policy rate at a low level for a prolonged period of time,” said Royal Bank of Scotland economist Silvio Peruzzo.

“However, the rhetoric is likely to turn gradually more hawkish in recognition of the macroeconomic outlook, which is evolving more positively than the ECB expected,” he added.

Concerns remain over the financial position of several EU countries.

This week, the European Commission said that another nine EU nations were now breaking a key rule requiring them to keep budget deficits beneath 3% of GDP.

Germany, Italy, the Netherlands, Austria, Belgium, Slovenia, Slovakia and Portugal had breached rules on budget deficits, as had the Czech Republic, which lies outside the eurozone.

The rules to keep debt and deficit within certain limits are designed to keep the finances of the 16 nations which use the euro in line, promoting the stability of the currency.

Other EU countries are also required to follow the rules on deficit and debt.

More countries are seeing their deficits widen as tax income falls, while spending increases to rescue failing banks and fund benefit payments to the unemployed. –BBC News