Thursday 22 August 2019

Economic chill spreads from Italy and Germany to eurozone nations

Former IMF managing director Christine Lagarde is replacing Mario Draghi at the European Central Bank. Photo: SAUL LOEB/AFP/Getty Images
Former IMF managing director Christine Lagarde is replacing Mario Draghi at the European Central Bank. Photo: SAUL LOEB/AFP/Getty Images

David Chance

Weak economic growth in the eurozone has spread beyond Germany's car industry and the ailing Italian economy.

France and Spain are now feeling the economic chill, with the European Central Bank (ECB) set to face pressure to cut interest rates.

Overall eurozone economic growth slid back to just 0.2pc in the second quarter from the first and growth in France slid to 0.2pc, in line with the wider bloc average after a period of outperformance.

Although unemployment in the bloc continued to fall to new lows, there was little feed-through into inflation.

The headline rate dipped back to 1.1pc from 1.3pc, moving further away from the ECB's 2pc target and increasing the risk that growth could stall.

"For the European Central Bank, the question is not whether to stimulate the economy more, but by how much it will do so in September," said ING senior economist Bert Colijn.

"As weaker demand and uncertainty about the future hold, the core inflation outlook seems to be weakening. That gives even more ammunition for the ECB to act, as if it needed any more persuading," he added.

The shift to rate cuts will come at a time when the ECB is transitioning to a new leadership under former International Monetary Fund managing director Christine Lagarde. She is replacing Mario Draghi, the man credited with saving the euro.

There are growing questions as to whether a mix of rate cuts into negative territory combined with yet more bond purchase will do much to stimulate growth in the bloc and there are fears that ever lower rates could damage Europe's fragile banking system.

By contrast with the ECB, the Federal Reserve was quicker to act to bail out the US economy and it has managed to raise interest rates above zero, so it has more room to cut to fight a downturn. The ECB has failed to hit its 2pc inflation target at any stage in the past five years, adding to concerns that its policy measures may fall short this time.

"With its deposit rates already at a negative 40bps, its balance sheet surging to 41pc of GDP and huge constraints on the bond-buying scheme, the ECB is pushing on a piece of string," TS Lombard's global head of macroeconomics, Shweta Singh, wrote in a research report published yesterday.

Even as the ECB readies its own measures, there are few signs that European governments are set to bolster the economy. The likes of Germany and the Netherlands are running large budget and current account surpluses, measures that critics say have contributed to the sluggish pace of eurozone growth.

"Germany will continue to run one of the largest budget surpluses globally over the next couple of years in spite of the sharp deterioration in its economic outlook," Ms Singh wrote in her report.

She does however expect France and Spain to step up spending, but warned that the budget standoff between Italy and the EU had exacerbated the pain for the stagnating Italian economy, the fourth largest in the eurozone.

Indo Business

Also in Business