The euro-zone recovery slows again
IN LESS than three weeks’ time the governing council of the European Central Bank (ECB) will hold its final monetary-policy meeting of the year. After it last convened, in Malta late last month, Mario Draghi, the bank’s president, indicated that the ECB would loosen policy still further in early December. Mr Draghi gave no indication, however, of how vigorously the ECB would act. Today’s figures for euro-zone GDP in the third quarter suggest that the council will do more to enhance activity and to revive inflation rather than less.
Recessions and depressions
The new numbers showed that the recovery continued to slow. Quarterly GDP growth had picked up to 0.5% (an annualised rate of 2.1%) in the first three months of 2015, the sprightliest pace since the euro area emerged from recession in the spring of 2013. But that slowed to 0.4% in the second quarter. Now it has decelerated again to 0.3%, weaker than the 0.4% consensus forecast among economists.
One encouraging sign was that France, the euro area’s second-biggest economy, which had stagnated in the spring, managed to grow by 0.3%. By contrast, growth in Germany, the biggest economy, slowed from 0.4% in the second quarter to 0.3%. Growth in Italy, the third-biggest, slackened from 0.3% to 0.2%, while the pace of expansion in Spain, the fourth-biggest and best-performing among the large economies, slipped from 1.0% to 0.8%. In three members of the currency club—Estonia, Finland and Greece—output fell. (Given the capital controls the Greek government imposed over the summer and the closure of banks for three weeks, the contraction in Greece, of 0.5%, was less severe than many had expected.)
The overall slowdown in the euro area was disappointing given the support that its economy has been getting. Consumer spending has been boosted by lower energy prices, which have had much the same effect as tax cuts. The ECB’s own policies, which include ultra-cheap funding for banks that improve their private-sector lending and negative interest rates as well as quantitative easing (creating money to buy bonds), are also a powerful stimulus. In particular they have contributed to a sharp fall in the euro, helping the currency union’s exporters.
Despite these favourable influences, the euro area is proving vulnerable to the malaise among emerging economies, which buy around a quarter of its exports. Germany is particularly affected by China’s slowdown since the Chinese have been avid purchasers of German investment goods and luxury cars. Tellingly, German industrial production fell by 0.3% in the third quarter whereas it rose in the euro area by 0.1%. Falls in new foreign orders for German manufacturers suggest the weakness will persist.
The evidence of an ebbing recovery will strengthen the case for bold action when the ECB’s council meets in Frankfurt on December 3rd. One likely measure will be an extension of its quantitative-easing programme, so that it carries on into 2017 rather than finishing as currently scheduled at the end of September. As well as that, the euro area’s monetary policymakers may well decide to drive the ECB’s deposit rate, which has stood at minus 0.2% since September of last year, deeper into negative territory. However, they will also bear in mind that in mid-December the Federal Reserve is likely to raise interest rates in America, the first such increase for almost a decade. That may restrain the ECB from making a big cut in the deposit rate since a rise in American interest rates will itself tend to weaken the euro against the dollar.
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