The euro-zone economy
The new mediocre
The ECB will do something at its meeting next week, but to what effect?
THE launch, a year ago, of the European Central Bank’s programme of quantitative easing (QE—creating money to buy bonds) sparked elation. Growth was picking up, consumers had a spring in their step and stockmarkets were jubilant. A year later spirits are sombre as the recovery flags, stockmarkets languish and deflation returns. After prescribing more medicine in December, the ECB is expected to increase the dose again on March 10th. But there are increasing doubts about its effects.
Consumer prices fell by 0.2% in the year to February (see chart), reinforcing the case for greater stimulus. Though this fall was driven by a renewed collapse in oil prices, the core inflation index, which excludes volatile items such as energy, is also looking wan. Prices rose by just 0.7% in the year to February, among the lowest readings since the euro was born 17 years ago. Despite a year of QE, during which the ECB has bought €60 billion ($65 billion) of bonds a month, it appears to be no closer to its goal of inflation of nearly 2% than when it started.
Unemployment has at least carried on falling, to 10.3% in January, reflecting the continuing economic recovery since the spring of 2013. But the upturn has failed to live up to the promise of early 2015, when GDP growth reached 0.5% (an annualised rate of 2.2%). That turned out to be the (not very) high point. Expansion subsequently slowed, to 0.3% (an annualised rate of 1.1%) in the final quarter of last year. GDP in the single-currency club is still below its peak in early 2008, whereas America’s is almost 10% above its pre-crisis high from eight years ago.
Consumers have sustained the euro-zone recovery as household budgets have stretched further thanks to lower energy prices. But investment growth lacks the vitality of previous upturns. That has left the currency union vulnerable to the recent setback in emerging economies, especially in China, which is hurting exporters. Industrial output fell in December in Germany, France and Italy, the three biggest economies in the euro area.
Whereas European stockmarkets were buoyant in early 2015, they sank in the first six weeks of 2016, with particularly sharp falls in bank shares. Though they have since recovered some of their poise, the Stoxx Europe 600 index remains 7% down this year; its banking component has fallen by 15%.
An index of business and consumer sentiment compiled by the European Commission, which tends to mirror GDP growth, has fallen from a recent high of 106.7 in December to 103.8 in February, with especially big declines among French and Italian consumers. German industry and trade is more worried about business prospects than at any time since late 2012, not long after the euro zone skirted a break-up, according to the latest Ifo survey.
All this will probably spur the ECB to do more when its monetary-policy council meets this month. In December it extended QE by six months until March 2017, raising the programme’s total size from €1.14 trillion to €1.5 trillion (14% of euro-zone GDP). It also cut interest rates, which first fell below zero in 2014, deeper into negative territory. The deposit rate was lowered from -0.2% to -0.3%.
At its March meeting, the ECB is likely to keep pulling on more than one lever. The deposit rate looks set to fall again, to -0.4%. The central bank may also extend another programme that it introduced in 2014, in which it has offered ultra-cheap long-term funding (stretching until September 2018) to banks that improve their lending to the private sector. Most important, the ECB may step up the pace of QE for the next six months or so, from €60 billion a month to, say, €75 billion. It may also extend the programme again, until September 2017, a full year after it was first supposed to end.
The markets had expected more from Mario Draghi, the ECB’s president, back in December.
But even if he comes up with the goods on March 10th, they are likely to remain sceptical. The effects of negative interest rates on inflation are hard to discern, but banks and insurers are obviously suffering.
The ECB could introduce tiered negative rates, protecting most of banks’ reserves from the lowest rate, but that did not spare Japanese banks from a stockmarket beating. Moreover, twiddling the dials of QE will not have the same impact as its introduction. Mr Draghi won a reputation as a magician when he cast his “whatever it takes” spell to save the euro, but now even he seems to be running out of tricks.