The European Central Bank may have done too little, too late

Policymakers may not have gone far enough in staving off an economic downturn

Katie Martin in London

Monetary hawks have been up in arms ever since the European Central Bank unleashed its latest volley of monetary easing earlier this month. But the more pressing danger may be that policymakers have not gone far enough in staving off a potentially severe economic downturn, leaving those hawks shrieking into a void.

The euro took a lurch lower on Monday and government bonds sprang higher yet again, after research provider IHS Markit said the eurozone economy was “close to stalling”. A “deepening manufacturing recession” is running alongside a slowdown in the service sector, it said, based on its regular survey of business executives.

One shred of comfort was that IHS Markit’s combined purchasing managers’ index for the manufacturing and service sectors spat out a reading of 50.4 in September. That was down from August, but still a nose above the 50 line that points towards economic expansion rather than contraction.

The manufacturing-specific index, however, fell far beyond market expectations to 45.6, and the Germany-focused report was especially grim. There, the manufacturing PMI dropped to 41.4, the lowest since mid-2009. Phil Smith, principal economist at IHS Markit, summed up the manufacturing data as “simply awful”.

The German data were “dismal”, said Rosie Colthorpe, European economist at Oxford Economics. “The reading shows that the industrial sector continues to be hammered by the uncertain outlook. And the outlook does not look much brighter . . . [The] data clearly raises the risk of a German recession in the third quarter.”

This is music to the ears of those hoping to see new lows in the euro before the year is out. At under $1.10 on Monday, the currency is already close to that point.

With no small irony, this all coincides with more signs that dissenters are not backing down in their assault on the flagship policy of outgoing ECB president Mario Draghi, who hands over to Christine Lagarde at the end of October.

On Monday, Klaas Knot, the Dutch central bank president, described the ECB’s triple whammy of lower deposit rates, fresh bond purchases and tweaked lending operations as “disproportionate”. The debate on the governing council about this latest package had been “heated”, he said.

But the data on Monday serve to push that analysis further to the sidelines. They provided “some vindication for Mario Draghi’s decision to go out with a bang”, said Hugh Gimber, global market strategist at JPMorgan Asset Management. “The task facing Christine Lagarde is a big one: slowing growth in an economy particularly vulnerable to global trade disputes, muted inflation expectations and limited policy headroom.”

If anything, the ECB is at risk of going down in history as having done too little too late — and failing in its vigorous efforts to convince politicians to play their part with fiscal policy.

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