FRANKFURT, Dec 6: The eurozone economy is set to contract both this year and next year, but will return to growth in 2014, the European Central Bank predicted on Thursday.

The ECB president Mario Draghi told a news conference here that bank staff had slashed their growth projections for 2012 and 2013 and drawn up its initial forecast for 2014. Draghi said the central bank now expected the euro area economy to contract by 0.5 per cent in 2012 and again by 0.3 per cent in 2013, but return to growth of 1.2 per cent for 2014.

In September, the staff projections had foreseen a contraction of 0.4 per cent this year and growth of 0.5 per cent next year. Draghi noted that following a contraction of 0.2 per cent quarter on quarter in the second quarter of 2012, euro area gross domestic product declined by 0.1 per cent in the third quarter.

Furthermore, available statistics and indicators pointed to further weakness in activity in the fourth quarter and “over the shorter term, weak activity is expected to extend into next year,” he said.

Nevertheless, a gradual recovery should start “later” in 2013 as the ECB’s low interest rate policy and rising market confidence fed through into household spending, while a strengthening of foreign demand should support export growth, Draghi said. The ECB governing council “continues to see downside risks to the economic outlook for the euro area,” Draghi said.

These were mainly related to “uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the US,” he added. Turning to inflation, the ECB staff projections saw area-wide inflation averaging 2.5 per cent this year, 1.6 per cent in 2013 and 1.4 per cent in 2014.

The ECB’s overriding priority is to keep eurozone inflation at close to but just below 2.0 per cent on a 12-month basis.—AFP