Trichet Says 2009 Will Be ‘Substantially’ Worse Than Forecast

By Francois de Beaupuy and Simon Kennedy

Jan. 19 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said the outlook for the euro-region economy is “substantially” worse than the bank predicted a month ago.

“The year 2009 will be very difficult,” Trichet said today in a speech in Paris. “Growth in the world and Europe will be substantially below what” most institutions projected at the start of December, he said.

The ECB last month forecast the euro-region economy would contract about 0.5 percent this year. Since then, data suggest Europe has slipped deeper into recession. The European Commission today projected the 16-nation economy will shrink 1.9 percent in 2009.

While the ECB is not scheduled to revise its forecasts before March, Trichet said the bank’s 22-member Governing Council took account of the deteriorating outlook in deciding to cut its benchmark interest rate to 2 percent last week. That matched a record low last seen in 2005.

European confidence has plunged to the lowest on record, industrial production posted its biggest annual drop in 18 years in November and unemployment rose to 7.8 percent, a two-year high.

Still, the ECB President said there are reasons to expect the economy to rebound. Investors have underestimated how fast authorities have responded to the crisis, emerging markets will remain sources of growth after a “temporary” slowdown, and the price of oil has fallen, he said.

“I consider that 2010 will be the year of recovery,” Trichet said. The ECB will continue to provide an “anchor of stability,” he added.

Trichet blamed the financial crisis on a mispricing of risk and said “we must put an end to the priority that’s given to the short term, in other words to the excessive focus on short-term gain in the financial sector, what we often call the ‘bonus culture’.” This attitude “tends by essence to encourage excessive risk taking,” he said.

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net; Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.