No inflation, not much growth

January 6, 2015

A metal sculpture depicting a stock exchange chart is seen in the reception hall of the Athens Stock Exchange in Athens

Euro zone service sector PMI readings for December are unlikely to alter European Central Bank thinking about taking the ultimate policy leap and commencing a quantitative easing government bond-buying programme, possibly at its Jan. 22 meeting.

With the price of oil going through the floor, German inflation fell to just 0.1 percent in December, data showed yesterday, and the euro zone number is predicted to turn negative for the first time since 2009 when it is published on Wednesday.

Activity data has been little better. The euro zone economy grew just 0.2 percent in the third quarter of the year and the last three months of 2014 are not thought to have been much better.

The flash PMI reading for the euro zone, released last month, showed the currency bloc’s private sector just about growing but with firms having to cut prices to drum up trade. Given the inflation outlook, that will worry policymakers. The reading pointed to Q4 growth of just 0.1 percent.

China’s services sector PMI, released today, grew at its fastest pace in three months in December although the much larger manufacturing sector is slowing and the property market is softening.

Having largely bought into the argument that Greece no longer poses a threat to its euro zone peers, markets had another think about the possibility of the currency club losing one of its number and dropped sharply on Monday.

The position of Germany and France has sounded somewhat equivocal.

In response to Der Spiegel reporting that it had shifted its view and now believed the euro zone would be able to cope with a Greek exit, Berlin said it did not want to lose any euro zone member but that the bloc was better equipped to limit contagion, while French President Francois Hollande said it was “up to the Greeks” to decide whether to remain part of the single currency.

There may be an element of sabre-rattling here, with the euro zone’s big powers trying to make clear to Greek voters that they will not be allowed to rip up austerity and bailout commitments with impunity as the leftist Syriza party, which leads in the polls, has vowed to. Either way, it has started to unnerve markets.

With a banking union now in place, most Greek debt held by other euro zone governments and EU institutions, a bailout fund established and the ECB poised to buy lots of euro government bonds there are good reasons to think that Greece can no longer threaten the currency bloc as a whole, no matter what happens in Athens. But it remains a risk most would prefer not to take.

Moreover, all the focus has been on financial contagion. More potent may be political contagion with parties from outside the establishment and centre ground burgeoning in any number of EU countries and looking to Greece for a lead. Syriza leader Alexis Tsipras is in close touch with Spain’s fledgling and surging Podemos party for one.

The slide in oil prices shows little signs of abating in the new year. They plunged as much as 6 percent yesterday to hit their lowest since spring 2009 before rebounding slightly this morning.

That has given little respite for the Russian rouble which is down a little having dropped more than 6 percent on Monday. The ripples are spreading with former Soviet republics Belarus and Turkmenistan being forced to devalue their currencies.

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