Sound bites: Eurozone economic confidence still reasonably upbeat despite an April slowdown

Eurozone economic confidence has only experienced a shallow slowdown in April to 102.0 from 102.5 in March. In general, Eurozone economic sentiment is still defying the laws of economic gravity. Despite the proximity of recession risk, fragile recovery, near record unemployment and chill political headwinds blowing in from the Ukraine, economic confidence is still reasonably upbeat. However, there are still fatal flaws in the Eurozone recovery and economic confidence is not out of the woods just yet. Domestic credit contraction, debt deflation and ongoing fiscal austerity still pose major fault lines for the recovery ahead. The ECB still needs to have their wits about them and must be quick to inject more stimulus into the economy. The Eurozone clearly needs easier and negative interest rates and the ECB needs to bring in real quantitative easing. There are still major external risks to contend with ahead. A bigger blow-up in the Ukraine crisis, the slowdown in the emerging markets and the loss of momentum in China’s economy could all derail confidence and the Eurozone recovery ahead. There are still tough times ahead for the Eurozone and economic confidence remains vulnerable and exposed. The ECB still needs to do a lot more shoring up to protect the recovery over the future. Eurozone rates could stay close to zero for many more years to come.

Sound bites: the BOE needs to raise UK interest rates now

The Bank of England needs to raise rates now. The UK economy is booming and the housing market is getting into a speculative frenzy. And it is the BOE’s fault. The Bank has left UK monetary policy in an over-stimulated state for too long and it is starting to damage longer term prospects for sustainable recovery. Thankfully there is still a slight surfeit of economic slack left in the UK so there is no immediate threat to faster inflation. But the Bank needs to move interest rates away from near-zero levels as fast as possible. The BOE would not be blamed for raising rates as soon as the May monetary policy meeting. As a first target, the Bank should be heading rates up to 3% over the next 18 months. UK base rates should be back towards neutrality around 5% in the next three years. The UK is the fastest growing economy in the G7 and it is now appropriate to be in the vanguard of the G7 rate tightening cycle.

                                Q1 2014   Q4 2013   Q1 FORECAST
    Pct change q/q         0.8         0.7            0.9
    Pct change y/y          3.1         2.7            3.2 

Sound bites: weak Eurozone money supply data is a clarion call for ECB to ease again

The weak Eurozone money supply data is a clarion call for ECB to ease monetary policy again. Eurozone money supply growth has been in negative growth territory for far too long and the ECB would be very unwise to ignore it any longer. March’s 2.2% annual contraction in lending to the private sector is a savage indictment that the ECB’s policies are not working. The Eurozone is just emerging from recession and needs as much stimulus as it can muster to foster faster growth. With the banks withholding much needed credit from the private sector, the recession will founder again before too long. The ECB can overcome this by dipping the official deposit rate into negative territory to force the banks to lend rather than hoarding it at the central bank. It is absolutely pointless for the ECB to add more liquidity into the money markets without sanctioning the banks to lend at the same time. Right now the Eurozone has a near zombie-like banking system that is inhibiting fuller recovery. The ECB must adopt a much more pro-active strategy to encourage the banks to lend and embrace quantitative easing at the same time to guarantee that the Eurozone returns to faster growth and fuller employment over the future. 

Sound bites: German IFO business climate index shrugs off Ukraine concerns

German business managers are shrugging their shoulders at rising political risks in the Ukraine. The jump in Germany’s IFO index in April reflects growing confidence in the domestic economy and optimism that the German economy is going from strength to strength. Unemployment is falling, consumer confidence is on the rise and the stronger business climate reflects the very easy monetary policy climate set by the ECB. Low interest rates are there to help the distressed Eurozone economies, but it is giving a huge boost to business sentiment in Germany. German business would be wise to take heed of the deteriorating political situation in the Ukraine. It has been a major factor reflected in Germany’s ZEW business confidence index. The prospect of a civil war in Germany’s eastern back yard would be potentially catastrophic for German business prospects ahead. But so far, bounding domestic optimism is completely outweighing any external risks.

The Munich-based Ifo think-tank's business climate index, based on a monthly survey of some 7,000 firms, increased to 111.2 from an unrevised 110.7 in March. Expectations in a Reuters poll of 40 economists had been for a fall to 110.5.

Key data

Germany                       April 14     March 14      April 13

Business Climate            111.2          110.7          104.3

Business conditions        115.3          115.2          107.2

Business expectations    107.3          106.4          101.4

Sound bites: UK rates set to go higher in the next 3 months.

The Bank of England might have passed on tightening this month, but the clock is ticking for higher rates. Tighter money is going to come a lot sooner than the market and consumers are expecting. Forget any notions that the BOE are going to wait until 2015. UK rates should be higher by the summer. There is a strong chance that the BOE will make a pre-emptive strike with higher rates in the next three months. They are going to go up fairly quickly from ½% to 3% at least. Governor Mark Carney has laid plenty of strong scent trails that rates are initially heading to the 3% level and UK consumers should better be prepared. All the monetary policy circuit-breakers are starting to engage. UK employment is picking up very sharply. UK trend growth is accelerating over 3%. And the UK housing market is showing tell-tale signs of boiling over thanks to all the Bank’s monetary generosity in recent years. The Monetary Policy Committee will be very uncomfortable with present trends and will be looking for a quick return to monetary normalisation. The advantage of raising rates this year is that it will not get bogged down with an election timetable in 2015. The next UK general election must be held by 7 May 2015. With UK rates set to rise, it can only be good news for a stronger pound, but bad news for UK exporters as competitiveness continues to suffer.

Sound bites: ECB chooses words rather than action

The ECB has missed another prime opportunity to ease policy again. Easier policy is long overdue. The Eurozone economy has been crying out for greater monetary stimulus for a long while. The economy is sliding towards deflation. Unemployment is close to a record high at 12%. And the recovery is flagging. Weaker parts of the Eurozone could easily slide back into recession. Easier policy will help to take the edge off the strong euro, providing a vital boost to the export sector. It looks like the ECB has failed to learn the error of its ways. It has slipped back into a cautious vein, preferring to wait and see, when the economy really needs some proactive policy response. It is pointless the ECB talking and hinting easier policy ahead and not coming up with the goods. It smacks of indecision. It is even more of a wasted opportunity as the Bundesbank has provided really clear signals that the ECB is good to go again with easing. It looks like the ECB will drag things out to the last minute at the recovery’s expense.