China’s slowing economy has already put a dent in Europe’s recovery and could force the region’s central bank to pump even more money into the system.
The European Central Bank on Thursday cut its forecasts for eurozone GDP growth for this year and next, pointing the finger squarely at falling demand from China and other emerging economies.
It also slashed its projections for inflation, saying consumer prices in the 19-country eurozone may rise by only 0.1% this year. Deflation may even return briefly, ECB President Mario Draghi said, due to falling oil prices.
“We may see negative numbers on inflation in the coming months,” Draghi told reporters.
After cutting interest rates as low as they could go, Draghi launched a massive stimulus program earlier this year aimed at firing up growth and inflation.
The ECB has been buying 60 billion euros ($67 billion) worth of government bonds and other assets since March — effectively printing money — and the purchases are due to run for at least another year.
He made clear that the bank could increase the size of its purchases, and prolong the program if necessary.
Critical to that decision will be figuring out precisely what is happening in China, where a stock market bubble burst in June.
The ECB’s latest forecasts were finalized on August 12, nearly two weeks before Chinese stocks crashed again, sending shock waves through global markets.
Draghi said he was hoping to hear more from Chinese officials at a meeting of the G-20 group of leading economies in Turkey this week.
“We are observing a weakening of prospects for the Chinese economy,” he said. “To know what are the origins of this change, and especially whether this is just the beginning of permanent lower long-term output, or a transitory phenomenon, is what we would hope to know more about … in the G-20.”
But just the hint of even looser monetary policy to come was enough to send the euro down about 1% against the dollar — a move that will be welcomed by European exporters. Stocks markets cheered the message that the ECB was ready to do more: indexes in Germany and France closed more than 2% higher.
