You cannot change what you refuse to confront.
(Reuters) – After European Central Bank chief Mario Draghi got his colleagues to sign up to a target for pumping money into the ailing euro zone economy, a raft of GDP reports are likely to show just why more help may be needed.
The ECB did not add to its arsenal of measures last week and is expected to wait and see the take-up of a second round of cheap loans being offered to banks in December before considering anything further.
But after signs of discord, Draghi did secure unanimous agreement that the ECB balance sheet would “move towards the dimensions it had at the beginning of 2012” when it was about 1 trillion euros higher than now.
Economists seized on the word “towards”, which casts some doubt over whether it amounts to a hard target. And the ability of the ECB to swallow its objections to full quantitative easing remains in question.
This week sees a raft of third quarter GDP reports from the euro zone, which are unlikely to make comfortable reading. Spain has already reported reasonable 0.5 percent growth on the quarter and few if any of its peers are likely to better that.
The currency bloc as a whole grew just 0.1 percent in the second quarter of the year andGermany contracted by 0.2 percent.
Hopes of a rebound have fizzled out with Europe’s largest economy struggling to eke out any growth to the point that it could be in recession, on the technical measure of two successive quarters of decline, come Friday.
Reuters polling has a consensus forecast of 0.1 percent growth in the euro zone as a whole and for Germany. France may just outdo them, growing by 0.2 percent, while Italy is predicted to contract slightly again.
“It looks as if the euro zone and Germany have avoided a technical recession. But let’s be clear, the mere fact that something has not got worse is no reason to cheer,” economists at ING wrote in a note.
Paris and Rome have been pressing the EU to focus more on measures to boost growth rather than cut debt in order to prevent a slide back into recession and to buy them time to push through structural economic reforms.
Greater government spending is arguably more likely to have a direct economic impact than monetary policy measures, which are like pushing on a piece of string while demand remains so low. Yet the country with the finances to spend more – Germany – will not entertain that argument.
PARTING OF THE WAYS
That will be a topic for discussion when leaders of the G20 economies meet in Australia at the end of the week, with the United States and others likely to renew their calls on Berlin to do more to boost growth.
The world’s major central banks are now facing in very different directions, a position that could cause stress in financial markets and the economies that underpin them.
October’s U.S. jobs report showed the unemployment rate fell to a fresh six-year low of 5.8 percent, backing the Federal Reserve’s decision to wind up its bond-buying program.
At the same time, the Bank of Japan has dramatically increased its pace of money creation, while the ECB agonises over whether to follow suit.
With Japan’s new policy gambit likely to push the yen lower still, and with the euro heading south versus the dollar thanks to the ECB’s efforts to reflate its economy, discussion of currency devaluation cannot be ruled out in Brisbane either.
“The ECB clearly wishes to position itself as a contender in the global ‘currency wars’ of competitive reflation, alongside the BoJ, with the aim of weakening the euro,” said Lena Komileva, chief economist at G+ Economics.
South Korea will not sit on its hands while a tumbling yen undercuts the country’s export competitiveness, its central bank chief said on Friday.
The Bank of England will produce its quarterly inflation report on Wednesday. With wage growth still largely absent and inflation dropping to just 1.2 percent in September, noises from within the BoE suggest that the timing of a first interest rate rise could be heading further over the horizon.
The latest Reuters poll of economists found an almost even split between those expecting a move in the first quarter of 2015 and those who think it will come later.
(Editing by Gareth Jones)
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