Friday, 28 February 2014

Sound bites: Eurozone being drawn into deflation

The Eurozone is slowly being sucked into the black hole of deflation. Headline inflation at 0.8% is dangerously close to negative territory for consumer prices. The threat of deflation and stubbornly high unemployment at 12% are a shocking testament that the ECB’s conventional monetary policy is not working. Near-zero interest rates and repeated tranches of ECB liquidity injections have failed to hit their mark. The Eurozone  is facing a very real threat of deflation and the risk of a dip back into recession is not too far away. It is time for unconventional means. The ECB needs to get bank lending kick-started again for consumers and business. Cutting the deposit rate below zero and charging banks for holding money at the ECB would be one way of incentivising banks to lend rather than hording money at the central bank. The economy clearly needs much more liquidity injection. A call to arms on true quantitative easing is well overdue. The ECB also needs to end its benign neglect on the strong euro. A weaker currency would help in the fight against deflation and help to boost the Eurozone export sector. It is time for a rethink at the ECB and the March policy meeting could be High Noon for a change in strategy.



Thursday, 27 February 2014

Sound bites: Eurozone economic confidence hardly a cause for cheer

Eurozone economic confidence is hardly a cause for cheer. After all that the ECB has thrown at the economy, including near-zero rates and a glut of liquidity, the recovery should have been doing a lot better by now. The economy is still effectively flatlining. Critically, consumer sentiment is still slipping. It is all down to a lack of real zeal and confidence. The weak economic picture, high unemployment, and domestic credit contraction are all taking their toll on economic confidence in the Eurozone. This could be exacerbated in the coming months if any escalation in the contagion currently sweeping emerging markets spills over into economic sentiment. Eurozone recovery looks very tentative right now. It would not take too much of a dent to consumer and business confidence to tip the Eurozone back into recession again. The ECB cannot rest on its laurels, even with rates close to zero. The odds are mounting that the ECB might have to decide to take official rates into negative territory soon to jump-start sustainable recovery ahead.


Sound bites: Weak money supply growth condemns Eurozone recovery to the slow lane

The Eurozone recovery remains stuck in the slow lane of recovery. Weak money supply growth is not only condemning the Eurozone to stagnant recovery, but it is raising the odds that the single-currency area could easily slip back into recession again. The latest M3 money supply growth rate running at a meagre 1.2% is far too low to support the vibrant recovery that Eurozone policymakers are desperately hoping for. Even with official interest rates as low as 0.25%, the ECB will fail to generate any meaningful stimulus until cheaper funding reaches the parts of the economy who urgently need it – Eurozone households and companies. It is not just money supply growth slowing to a crawl, bank lending remains in negative territory after years of contraction. Consumer credit and corporate borrowing both continue to contract at an underlying -3% annual rate. The economy cannot operate like this much longer. Eurozone consumers and businesses are not getting any real benefit of wafer thin interest rates. It is down to lack of supply and lack of demand. Tougher capital adequacy rules are constraining the banks’ ability to lend. Meanwhile, the fragile economic picture, weak confidence and high unemployment cast very long shadows over the demand for credit. The ECB still needs to think outside the box to get the Eurozone motoring into the fast-lane. A change of heart on quantitative easing still beckons ahead.