Thursday 27 June 2019

French flop adds to eurozone economic woes and ECB headaches

The ECB faces tough choices
The ECB faces tough choices

David Chance

Industrial production in France fell by 1.3pc in November from the prior month, putting it on track to record just 0.5pc growth for the year in the latest gloomy economic release for the eurozone.

Last week, data showed German industrial production fell for the third successive month and Italy may already be in recession. That means three of Europe's biggest economies are stuttering or falling, casting a pall over the sustainability of the bloc's recovery and the ECB's plans to raise interest rates this year.

The central bank itself is well aware of the gloom. At its December monetary policy meeting it discussed the greater risks surrounding the eurozone economy and whether it should downgrade its assessments of the economy "as tilted to the downside" from "balanced".

Minutes of the discussion suggested some policymakers would have liked Mr Draghi to be more cautious than he has been. At least some called for a discussion on a new round of cheap credit to banks. Any capitulation from the ECB in the language that it uses to describe the state of the economy would have sent shockwaves through markets.

That's because it would have signalled it did not believe the bloc would be strong enough to cope with the start of interest rate rises, which it says is likely to happen late this year.

Most private sector economists doubt the ECB will hike rates as planned. Some expect a rate rise in 2020, and some say it will not be able to raise interest rates before the next downturn hits Europe.

Among the pessimists is consultancy firm Capital Economics, which cut its eurozone growth forecast for this year to just 1pc.

Irish Independent

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