Sound bites: ECB policy unchanged, but leaving them a lot to do

No surprises that the ECB have left policy unchanged as they wait for the next spark for action. The ECB needs to look no further than the economy for clear signs that they have a lot more easing to do. The Eurozone economy is crying out for easier monetary policy. Inflation and money supply growth falling well below target, the domestic credit contraction and chronic recession all underline that the ECB’s monetary policy settings are still far too tight. Draghi is clearly poised to cut rates again at some stage. The problem is that they are running out of ammunition with lower rates as a policy stimulant. There is probably only one more rate cut bullet left in the bag. The marginal effect of one further quarter point rate cut will be next to nothing other than symbolic.

It is down to much more conventional monetary easing and the introduction of ‘special’ measures to get the recovery underway and to avoid the risk of Eurozone deflation going viral. Germany’s economy may be doing ok and keeping its head above water, but most of the rest of the Eurozone is drowning in recession. It is time to act and act soon. The ECB needs to lubricate prospects for recovery with much better access to cheap credit for consumers and small and medium sized enterprises. The continuing contraction in Eurozone private sector loans underlines that the money already released by the ECB into the system is not getting through to borrowers. This is not a demand problem, but a supply constraint. The banks are keeping back ECB funding for their own prudential balance sheet protection. If the banks are holding up funding going into the economy, then they are starving recovery of vital sustenance. The ECB needs to act on this fast and impose lending incentives for the banks. At some stage, the ECB will also need to exorcise their demons and consider quantitative easing as another vehicle for pump-priming recovery. After all, if it has worked for the US and is starting to bear fruit in Japan, it needs careful consideration in the Eurozone now.

Sound bites: UK Bank of England policy on hold awaiting Carney

No great surprise that the Bank of England’s MPC have sat on their hands for another month. UK monetary policy is firmly on hold until new man Carney comes in to head up the monetary policy committee next month. Then we will see if the monetary sparks start to fly again. With some early signs of recovery starting to bud in the economy, it might be a good few months until Carney launches any new monetary initiative. Carney is unlikely to hit the ground running and will probably prefer to watch, wait and see whether QE needs another top up. There is probably an evens chance whether another £25bn top up will be required later this year. In all probability, the new emphasis of MPC policy will probably steer towards microeconomic initiatives like the Bank’s Funding for Lending Scheme. Ready and available access to cheap credit for personal and small and medium company borrowers  will probably be a key means for the BOE to help lubricate recovery ahead, especially while the government’s austerity policies continue to take their toll.

Sound bites: April's 2.3% dip in German new orders does not signal the start of a new downturn

April’s 2.3% dip in German new industrial orders is nothing to worry about. It comes on the heels of two very strong months of new orders expansion in February and March. It does not detract from the German recovery which is moving well into its stride now. German exports have been the bright spot in the German recovery and foreign orders seem to be trending back towards their long term growth potential. The key for sustainability going forwards will be the health of Germany’s economic partners in the Eurozone. Unless these get back into better shape, they could start to throw an anchor out behind German export growth since the Eurozone accounts for such a large slice of German foreign trade.

Outside of Europe, the picture remains much brighter. Beyond Europe, capital and investment goods orders are still faring well as the global economy continues to tool up for recovery ahead. German capital goods orders outside of Europe continue to move above trend. This should be an important bellwether for world growth potential.

On a two month trend, new German export orders are up 0.6% compared with a year ago, a positive result considering the dismal economic picture in the Eurozone. German domestic orders are down 2.2% compared with a year ago. Domestic demand should eventually be re-vitalised by the wave of positive pay awards in Germany boosting disposable incomes and consumer spending power. The outlook is a lot brighter than the latest figures suggest.

                               APRIL 13           MARCH 13
                           Index      Pct     Index      Pct
                                     change            change
 Total domestic orders     99.8     -3.2      103.1   +2.0
 Total foreign orders      106.2    -1.5      107.8   +2.7
     of which euro zone    94.6     -3.6      98.1    +4.0
        non-euro zone      114.3    -0.2      114.5   +1.9
 Intermediate goods        99.4     -1.9      101.3   +3.4
 Of which: domestic        97.7     -4.0      101.8   +3.8
           foreign         101.5    +0.8      100.7   +2.9
    of which euro zone     97.9     -3.5      101.5   +5.8
       non-euro zone       104.9    +5.0      99.9    unch
 Capital goods             105.7    -3.6      109.7   +2.2
 Of which: domestic        102.2    -3.2      105.6   +0.7
           foreign         107.8    -4.0      112.3   +3.2
    of which euro zone     89.5     -7.0      96.2    +3.9
       non-euro zone       117.8    -2.7      121.1   +2.9
 Consumer goods, durables  106.6    +7.5      99.2    -0.8
 Of which: domestic        98.6     +2.4      96.3    +0.5
           foreign         113.5    +11.7     101.6   -1.8
    of which euro zone     109.4    +14.8     95.3    -1.5
       non-euro zone       118.0    +8.7      108.6   -2.2

Two-month comparison April/March 13 with previous two months:

 Industrial orders                  +2.3
 Domestic orders                    +1.4
 Foreign orders                     +3.0
       of which euro zone           +2.8
            non-euro zone           +3.1
 Intermediate goods                 +2.9
 Capital goods                      +1.9
 Consumer goods, durables orders    +1.9

Unadjusted two month comparison April/March with same period a year ago:

 Industrial orders                  -0.6
 Domestic orders                    -2.2
 Foreign orders                     +0.6
 Intermediate goods                 -0.4
 Capital goods                      -1.0
 Consumer goods, durables orders    +0.7