A recession in Italy and weak growth across Europe could force the European Central Bank to rule out interest rate hikes this year.
Italy slipped into recession in the fourth quarter of 2018, according to data published Thursday. The countries using the euro currency collectively generated annual growth of just 1.2% during the final three months of the year, down from 1.6% in the previous quarter.
Andrew Kenningham, chief Europe economist at Capital Economics, said the data “confirms that the region has lost a lot of momentum.”
“We expect the ECB to reduce its GDP growth forecasts … and to make clear that it does not expect to raise rates until next year at the earliest,” he added. The ECB next meets to set policy in March.
There is growing evidence of a global economic slowdown caused by the trade war between the United States and China and uncertainty over Brexit.
On Wednesday, the US Federal Reserve signaled that it will throttle back its plans to raise interest rates this year amid rising economic uncertainty.
Chairman Jerome Powell told reporters that the central bank “can best support the economy by being patient and evaluating the outlook before making any future adjustment to policy.”
Many of the world’s largest central banks are only just starting to reverse stimulus programs launched following the global financial crisis. Interest rates set by the ECB remain ultra-low, and the central bank has yet to begin unwinding €2.6 trillion ($3 trillion) in extraordinary stimulus injected into the economy since 2015.
Critics say that leaves the central bank with very limited ability to respond to slower growth.
Kenningham said that the 0.2% contraction in Italy during the fourth quarter was worse than expected. France and Spain outperformed expectations, but not enough to counter the broader trend.
“This was a disappointing end to the year,” he said. “And with business surveys having fallen further in both December and January, the start of 2019 looks no better.”