November 5, 2018 / 9:08 AM / a year ago

Euro zone growth potential has recovered from crisis-era lows: ECB

FILE PHOTO: The headquarters of the European Central Bank (ECB) and the Frankfurt skyline with its financial district are photographed on early evening in Frankfurt, Germany, March 25, 2018. REUTERS/Kai Pfaffenbach/File Photo

FRANKFURT (Reuters) - The euro zone’s growth potential has recovered from lows hit during the debt crisis but remains below its pre-crisis level and an ageing population will keep it under pressure, the European Central Bank said on Monday.

Lukewarm growth has been a key problem for Europe over the past decade and indicators suggest a rare boom over the last two years is starting to fizzle out, with growth returning to below 2 percent, a key concern for the ECB which is hoping for higher inflationary pressures.

Potential growth, or the rate that can be sustained without generating excessive inflation, fell to below 1 percent during the worst years of the crisis but it is now estimated at around 1.5 percent, the ECB said in an Economic Bulletin.

“Available estimates indicate that euro area potential growth has increased over recent years, although it remains weaker than before the global financial crisis,” the ECB said.

“Population ageing is expected to exert downward pressure on euro area potential growth over the coming decades.”

Still, for now, the currency bloc appears to be operating at close to potential as above-potential growth in recent years absorbed its spare capacity.

“Supply constraints are likely to become increasingly binding going forward, which would be conducive to a gradual strengthening of wage growth and underlying inflation,” the ECB said.

The euro zone economy grew by an annual 1.7 percent in the third quarter, a big slowdown from the previous quarters, and the ECB’s study would suggest any further drop could drag it below potential, at which point inflationary pressures may ease.

Reporting by Balazs Koranyi; Editing by Robin Pomeroy

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