Euro zone economy too weak to support sustainable growth

Though the recovery in the European economy appears to have picked up some speed since the beginning of this year, the growth is too weak to support a sustainable recovery, as the deflation risk is mounting and rooted problems remain unsolved, said British experts. DEFLATION RISK The recent euro zone data suggest that the worst is over, with GDP expectations for this year and the next being pushed higher. However, "our economists have long been of the view that the growth recovery in the euro zone will not be strong enough to reverse the dis-inflation trend," said HSBC Global Research in an analysis report Friday. The inflation rate in the euro zone dropped to a mere 0.5 percent in March, the lowest level in the past four years, showed data released by Eurostat, the statistical office of the European Union. The figure is not only far below the European Central Bank (ECB)'s inflation target of 2 percent, but also approaching to the edge of deflation. HSBC expects that the ECB will have to resort to further stimulus in the coming months. Fitch Ratings, a London-based international credit rating agency, warned that it sees deflation as a greater risk in the euro zone. "It is unlikely that experimenting with mildly negative deposit rates would be transmitted into a meaningful stimulus to the real economy," said Fitch in a note. The eventual quantitative easing policy would still face potential political and legal challenges given the prohibition on monetary financing under the Treaty of the European Union, added Fitch.