Europe’s easing growth
European growth is weak. As a whole, eurozone GDP grew just 0.2% in the first quarter, and no individual economy grew more than 1.1% (Poland and Hungary). Germany, the UK, and Spain all reported modest growth, but Portugal, Italy, and the Netherlands all saw negative growth while France was completely flat. The latest OECD report on the global economy, noted that the euro area is expected to grow by 1.2% this year, but “monetary policy needs to remain accommodative” and “ interest rate reduction is merited, given low and falling inflation”.
At yesterday’s annual SALT conference of hedge-fund investors and managers, David Tepper said the ECB is “really, really behind the curve”, and there is a risk to the global economy if the ECB doesn’t take drastic action. Jennifer McKeown wrote in a note for Capital Economics that she expects “more significant action, including small cuts in the refinancing and deposit rates and quite possibly a full blown QE programme, to come next month or soon after”.
But it’s unclear how far Europe’s central bank is willing to go. Reuters reports that the ECB is preparing to loosen its monetary policy at its upcoming June meeting, possibly going as far as cutting the deposit rate into negative territory. The package includes “stimulus for the euro zone economy but falls short of the large-scale effect the ECB could unleash with a major program of quantitative easing“.
A DBS research note from April says that QE would be fundamentally more challenging in Europe’s bank-based system than it is in the U.S.’s capital markets system. First, policymakers would have to choose what kind of assets to buy. Then, they would have to make sure the purchases were actually legal — a hurdle after the difficulty the ECB has had with its outright monetary transactions program.
But Larry Elliott thinks QE is eventually inevitable because of the eurozone’s long list of economic problems:
Tension in Ukraine is eating into business and consumer confidence. China’s slowdown will have an impact on Germany’s export-dependent economy … The commercial banks are still weak following the losses made in the 2008-09 recession. Credit taps have been turned off and, unlike in the UK or the US, there has been no attempt at off-setting action by the European Central Bank … This lack of finance is making it hard for the recovery to get traction.
Then again, it’s probably worth pointing out that the effectiveness of QE on the economy is still an open question. — Shane Ferro
On to today’s links: