Jose Luis Escriva, a member of the European Central Bank Governing Council and the Bank of Spain governor, spoke in Madrid about economic risks in the euro-zone. He noted that these risks are leaning towards the downside, although disruptive scenarios have not come to fruition.
He stated that current levels of uncertainty are the highest ever recorded, surpassing previous crises such as COVID-19, the Ukraine conflict, and the 2008 financial crisis. In the ECB’s latest meeting, the growth forecast was adjusted to 0.9% for 2024 and 1.2% for 2025.
Economic Performance Concerns
Escriva’s remarks highlight concerns about weaker-than-expected economic performance in the euro-zone. While the worst-case scenarios have not materialised, the risks are leaning towards contraction rather than expansion. This shift in outlook follows a downward revision of growth projections, indicating slower momentum for the next two years. The fact that uncertainty is considered higher than during past crises underlines the growing unpredictability in financial markets.
The adjustment to growth forecasts reinforces expectations that economic expansion will remain subdued. A downgrade to 0.9% for this year and 1.2% for next year points to weaker demand, which carries implications for central bank actions. If economic activity slows further, inflation could fall faster than initially anticipated, prompting policymakers to reconsider their approach. Market participants will need to assess whether incoming data supports these lower forecasts or if further downward revisions become necessary.
Escriva’s assessment suggests concern among policymakers about downside risks rather than upside surprises. With uncertainty surpassing previous crises, it is clear that external shocks and internal weaknesses continue to weigh on expectations. The ECB will likely monitor these risks closely, and if growth struggles, discussions about potential policy adjustments may intensify.
Market Sensitivity To Risks
We have seen how markets react when economic risks tilt downward, and traders should anticipate increased sensitivity to data releases. If upcoming reports confirm weaker conditions, asset prices could move in response to changing expectations around interest rates and monetary policy. This heightened state of unpredictability makes it necessary to interpret economic signals with greater precision, particularly as policymakers gauge whether they need to adapt their stance.
Escriva’s observations provide a clear indication that the path ahead is not straightforward. While inflation remains a key concern, growth concerns are becoming harder to ignore. Markets should expect policymakers to emphasise data dependency in their decisions, meaning each economic indicator will carry more weight than usual. The extent to which these risks materialise will shape future decisions, leaving little room for complacency.
