With little sign of economic recovery in Europe and governments incrementally loosening their austerity drives (Britain being the exception) the focus turns to the big central banks on our patch and what more they might be able to do to foster some recovery.
With the European Central Bank meeting on Thursday, President Mario Draghi is in Shanghai saying the euro zone is on track for only a “very gradual recovery”. It’s hard to tell at a glance whether that is a rhetorical downgrade of the existing forecast for a pick-up in the second half of the year with downside risks attached. Either way, the pressure on the ECB to act again is growing.
However, don’t expect anything at its monthly meeting on Thursday, although a further interest rate cut could come this year and there is still talk of cutting the deposit rate – the return banks get for parking funds at the ECB – into negative territory to try and get them to lend. The big question is would that achieve much? Despite being in a world awash with central bank money, there is clearly a reluctance among banks to push money into the real economy. The latest data showed bank loans to euro zone businesses and households contracted for the 12th month in a row in April.
Draghi has left the door open for negative deposit rates but beyond that it’s not clear what is doable. The ECB’s bond-buying plans are dormant because no country needs the help at the moment and there is no talk of a repeat of last year’s 1 trillion euro splurge of cheap long-term liquidity to banks. Discussion about boosting lending to smaller companies is ongoing but the central bank is reluctant to lead the way and Germany has already waded in with bilateral plans to help Portugal and Spain.
Manufacturing sector PMI surveys for euro zone countries and the UK today are likely to show Germany will grow more strongly in the second quarter but others will again be left trailing in its wake. We will pick up Asia’s global economy piece which is nosed on China’s equivalent report showing factory activity shrank for the first time in seven months in May. The parallel U.S. figure is due later.