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.
New View Economics is an independent consulting group. Macroeconomics and forecasting the financial outlook is the name of the game, using a holistic approach to getting the markets right.
Friday, 28 February 2014
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.
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