Sound bites: Eurozone economic confidence still needs more of a lift

Eurozone economic confidence is back in business again, rising to 102.7 in May from 102.0 in April. But the Eurozone recovery still needs more of a lift. Consumer and business confidence is rising but is still generally diffident about the outlook ahead. Uncertainty about global economic prospects, worries about the crisis in the Ukraine and the long wait for additional ECB easing have been clouding the recent picture. But this should all change next week once the ECB shifts into an easier credit gear again. An interest rate cut into negative territory and a decisive step towards quantitative easing should do the trick. If the ECB can deliver the goods on significantly easier monetary policy, the obstruction to faster Eurozone recovery could clear quite quickly. Growth expectations for the next year could double from 1% to 2%. It would mean the ECB’s acceptance of a radically weaker euro and the risk of higher inflation but this is what the Eurozone recovery needs right now. The EU summit this week is looking for a change in the political landscape and demanding faster growth and more job creation to blunt the election in-roads made by euro sceptic parties. It is time for the ECB to grasp the nettle. The price will be a much weaker euro, but a stronger Eurozone economy will be the reward.

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

Weak monetary dynamics remain the most convincing reason why the ECB must ease credit policy again very soon. Next week’s ECB meeting should be High Noon for a rate cut and more liquidity injection into the Eurozone financial system. Eurozone M3 money supply growth at 0.8% is far too tepid to support faster recovery. Eurozone domestic credit contraction running at -1.8% is a major obstruction to support any real recovery in consumer demand and corporate business expansion. Consumer credit contracting by -2% annually and corporate borrowing falling by -3% highlight major faultlines in the ECB’s recovery strategy. Balance sheet constraints on Eurozone banks ability to lend compound the problem. Weak borrowing demand, restricted credit supply and a low level of economic confidence all add up to a blighted recovery outlook ahead. The ECB can change things very quickly by pushing official interest rates into negative territory, forcing the reluctant banks to lend again. It can also open the door to real quantitative easing, flooding the economy with extra liquidity and weakening the euro at the same time. Although German exporters may not need it, hard-pressed exporters elsewhere in the Eurozone would certainly enjoy the added impetus to competitiveness. 

Sound bites: UK retail sales upturn suggests higher UK rates as soon as June

The explosion in UK retail sales demand is another piece in the BOE’s jigsaw for higher rates. The boom in Britain’s High Street and the fast inflating housing bubble are a clarion call to Mark Carney to hike rates as soon as possible. Carney is already warning that the BOE’s objective is to get rates back to a minimum of 3% as soon as possible. UK consumers are being handed a free lunch with rates so close to zero. It will not last for much longer. The UK’s present macroeconomic picture is unsustainable. The surge in April UK retail sales underlines that UK consumers have a spend, spend, spend attitude that will end in tears fairly soon – higher inflation and higher rates. The odds are that the BOE has passed tipping point and that UK rates could go up as soon as the June MPC meeting. The markets and sterling are underestimating the logic that UK rates are set to surge very quickly over the next year. 

RETAIL SALES VOLUME     APRIL   MARCH          FORECAST
 Monthly s/adj change     1.3     0.5    (0.1)    0.5
 Year-on-year change      6.9     4.8    (4.2)    5.2
 3mth/3mth                1.8     0.9    (0.8)
 Sales excl. fuel mm      1.8     0.1   (-0.4)    0.5
 Sales excl. fuel yy      7.7     4.9    (4.2)    5.3