ECB's Lagarde Says Eurozone Outlook Uncertain Amid Downside Risks

(RTTNews) - Euro area medium term economic outlook is uncertain, and growth is set to remain weak in the short term while inflation is expected temporarily rise, European Central Bank President Christine Lagarde said Wednesday.

"Survey-based data suggest that growth will be weaker in the short term, on the back of slowing growth in the services sector and a continued contraction in manufacturing," Lagarde told lawmakers of the European Parliament at a hearing.

That said, the economic recovery in the single currency region is expected to pick up somewhat in the future as consumer spending is forecast to rebound with the rise in real incomes and investments are likely to recover as the impact of past interest rate hikes fade away, the ECB chief said.

Lagarde also noted that surveys point to slowing employment growth and further moderation in the demand for labor. The labor market has remained resilient thus far with record low unemployment and job growth, she added.

"The medium-term economic outlook is uncertain, however, and dominated by downside risks," Lagarde said.

"Geopolitical risks are elevated, with growing threats to international trade."

Eurozone is exposed to foreign shocks through high degrees of trade openness and integration into global supply chains, Lagarde noted.

Further, potential trade barriers pose threats to manufacturing and investment, the central banker said. Labor cost growth, a main component of the sticky services inflation, is expected to continue slowing in the coming months.

"Looking ahead, inflation is expected to temporarily increase in the fourth quarter of this year, as previous sharp falls in energy prices drop out of the annual rates, before declining to target in the course of next year," Lagarde said.

The ECB is widely expected to cut interest rates again this month after the expected acceleration in inflation in November as policymakers increasingly worry about the sagging growth.

"We will review our stance again next week, following our data-dependent and meeting-by-meeting approach," Lagarde said. "We are therefore not pre-committing to a particular rate path."

The central bank for the euro area had lowered rates by the same volume in September and October.