LONDON: The economies of the United States, China and much of the developing world have decoupled from Europe, leaving it to wallow in various stages of recession and fiscal disarray. That is one reason why the key economic event of the coming week will be a European Central Bank meeting almost totally focused on how far policy makers will go to boost growth.
Although there are some signs that a bottom may have been reached in the eurozone’s recent economic decline, the pattern of moderate US and Asian growth book-ending feeble Europe is firmly in place for the moment.
Manufacturing surveys published just a few days into 2013 laid out the divide starkly. The United States and China both came in above the 50 index level that designates growth while the euro zone languished in recessionary territory for the 17th month in a row.
The December US jobs report last Friday also did nothing to dispel the idea of recovery, although the prospect of more wrangling over the US budget still casts a shadow. The dollar has even begun to rise on the distant prospect of an exit from years of stimulus.
“From a growth outlook, it is quite hard for Europe to disappoint,” said Michael Metcalfe, responsible for global macro strategy at State Street Global Markets. He argues that one of the main risks to the current global economic consensus is that there is too much gloom attached to Europe.
Most discussion about what the ECB will do at its meeting on Thursday centres on whether it will cut interest rates, something the bank’s policy makers discussed last month before opting to hold the refi benchmark at a record low 0.75 percent. It is an open question among economists about how much use a cut in the refi rate would be. Cutting the deposit rate from zero, meanwhile, would effectively mean charging banks for parking their money.
Part of this refi rate cut talk is because inflation expectations are seen fairly well anchored and because the ECB’s own forecasts suggest the euro zone economy will shrink 0.3 percent this year. “The economic data would support a rate cut,” said Sarah Hewin, head of Europe research at Standard Chartered Bank.
The consensus of a Reuters poll in December, however, was for no cut in the first quarter. ECB Executive Board members Yves Mersch and Peter Praet have both dampened expectations of a cut in the main refi rate.
Joerg Asmussen, another ECB board member, also said late last month he would be “very reluctant” about the ECB cutting its deposit rate - now at zero - any further. Berenberg Bank economist Christian Schulz argues that those against cutting rates have an upper hand at ECB at the moment because ECB President Mario Draghi needs support for his new bond-purchase programme, a backstop to deter investors from selling off debt in countries such as Spain and Italy. Reuters
