World Economy

Europe Needs Growth to Avoid Another Recession

Europe Needs Growth to Avoid Another RecessionEurope Needs Growth to Avoid Another Recession

The euro zone's struggle to avoid another recession will take center stage in the coming week in the absence of major US data, as investors mull whether the ECB's new asset-buying plan is a prelude to even more radical steps.

While data from China may give clarity on a pattern of uneven growth there, it is in Europe that the prospects for the economy are most uncertain, although a ceasefire in Ukraine could lift the mood and avoid new EU sanctions on Russia this week, Reuters reported.

The euro zone's fragile economic recovery came to a halt in the second quarter, in marked contrast to the United States, where the economy grew robustly. Like many of its neighbors struggling to rebound from the debt crisis, Italy slipped into recession for the third time since 2008.

EU finance ministers and European Central Bank President Mario Draghi will convene on Friday in Milan, where the ECB's latest move to help the economy and avoid deflation will be at the forefront of discussions.

The ECB stunned markets last week by cutting interest rates and announcing a plan to buy asset-backed securities from October, which Barclays described "as a clear first step into quantitative easing" - a US-style bond-buying program that could help the economy but divides the central bank.

Draghi said his aim was to expand the bank's balance sheet back to the heights reached in early 2012, which equates to a rise of around 50 percent or 1 trillion euros in new assets.

"There's now a 50-50 chance that the ECB will go further and announce a sovereign bond-buying program by year-end, or the beginning of 2015," he said.

Under its statutes, the ECB is banned from buying bonds directly from governments but can find ways to purchase them from banks, for example, on the secondary market.

An inflation rate of just 0.3 percent, coupled with the lack of economic growth, has given new urgency to the bloc's search for growth. The ECB is urging governments to also do their part and enact ambitious structural reforms.

Uneven Chinese Expansion

In Asia, the central banks of South Korea, Indonesia and the Philippines hold monetary policy meetings this week.

The People's Bank of China has so far refrained from cutting interest rates, preferring instead to ease liquidity for some banks to free funds for lending. Beijing in turn has tried to ease conditions in the property market.

Activity in China's vast factory sector cooled in August as foreign and domestic demand slowed, spurring new calls for more policy easing to prevent the economy from stumbling once more.

But China's services sector rebounded in August after a drop in July, offsetting factory-sector weakness and letting the government stick with its policy stance.

"The economic expansion is quite uneven, as exports accelerate, investment slows, and the real estate correction intensifies, but on balance, headline real GDP growth is probably a bit faster to the third quarter," said Bill Adams, an economist at PNC Financial Services Group.