New eurozone blow as German experts downplay ECB rate hikes
The outlook for Europe has turned dramatically for the worse and economic data now suggests that the European Central Bank will not be raising interest rates this year and possibly not even in 2021 as a downturn looks set to gather pace.
The latest gloomy news came from the German Ifo Institute for economic research yesterday when its economic climate index recorded its first negative reading for the eurozone since 2014 at a negative 11.1 points.
Ifo, one of the most respected economic bodies in Europe, said that its experts were "increasingly pessimistic about future exports, investments, and private consumption" and that interest rates were likely to rise more slowly in the next six months.
The findings from Ifo, based on a survey of 411 economic experts, comes hard on the heels of data last week that showed the eurozone expanded just 0.2pc in the final quarter of the year and that Italy slid back into recession.
At its meeting last week, the ECB repeated its mantra that it stood ready to raise interest rates in the final quarter of the year, although it did acknowledge that risks were tilted to the downside.
The reality is however that few economists expect a rate hike this year or next and worry that the ECB will be stuck with deeply negative interest rates even as the next recession hits.
Pricing in bond markets appeared to catch up with the poor economic fundamentals of the eurozone yesterday and the forward rate suggested that there would be no rise in the deposit rate, currently minus 0.40pc, and that it would not rise above zero until mid-2021.
"For the ECB, the weak growth rate means that the current staff projections of 1.7pc growth for 2019 will be a tall order," said Bert Colijn, senior eurozone economist at investment bank ING.
"With this, the almost philosophical debate in the governing council of where we are and where we are going may take a more pessimistic turn that will please the doves," Mr Colijn said.
Quite what tools the ECB would have at its disposal in the event of a severe economic downturn in the bloc is open to question.
Its bond purchases have reached their legal limits and there are concerns about the effectiveness of pushing interest rates even deeper into negative territory.
The eurozone has spent much of the post-recession era freeloading on economic expansions elsewhere which have allowed the bloc's export machine to thrive and stockpile excess savings that have seen the euro area's current account surplus surge to 4pc of gross domestic product from 1pc in 2013.
It is not just Germany. The Dutch current account surplus hit 10pc of GDP at the end of 2018 and household savings levels are at 9pc of disposable income - well above the 5pc average in the eurozone.
The Dutch, like the Germans, have embraced rules to stop excessive government borrowing, which may limit their ability to reverse a downturn.