World Economy

ECB Economic Tonic Working

ECB Economic Tonic Working ECB Economic Tonic Working

In Europe spring is in the air and even in the downtrodden eurozone there are some brighter signs of life. The eurozone is not out of the woods yet and still has a very long way to go before sustainable recovery is safely secured. But at least there is some encouraging evidence that the European Central Bank’s economic tonic is starting to work. All is not lost just yet.

The eurozone had a very bad time during the 2007-2009 global crash and then put global markets through the wringer during the 2010-2013 European debt crises. There were moments when the eurozone seemed close to collapse and it has taken herculean efforts by the ECB and European Union policymakers to spare the euro from a complete wipeout, New View Economics reported.

The global economy is not an easy place right now and there are plenty of potential risk factors lying in wait to upset confidence. Worries about a China hard landing, the threat of steeper US monetary tightening, the emerging markets’ crisis, rising geopolitical tensions and residual eurozone risks still remain potent threats to the global outlook.

The ECB might have arrived late to the global reflation game but moving rates into negative territory and bold quantitative easing measures, which laced the eurozone with cheap and easy money, finally seem to be working. Thanks to the super stimulus, even some formerly distressed eurozone states are staging impressive comebacks.

Business conditions may be slowing down in the eurozone’s biggest economies, Germany and France, but there are sure-fire signs of rapid economic expansion in some of the smaller eurozone countries. Greece may be flirting with recession still, but strong growth tendencies evident in Ireland and Spain underline that both economies have staged dramatic bounce backs from the darkest days of the eurozone debt crisis.

Stable Outlook

The latest purchasing managers surveys show Ireland and Spain doing particularly well even though economic activity rates are down a little from a year ago. And despite deep-set public sector debt and budget deficit worries, even the mood in Italy seems to be holding up reasonably well. It is all adding to a more stable outlook for the eurozone as a whole.

It supports the optimism offered in recent European Commission forecasts for output in Spain to expand by 2.8% this year and for it to grow by as much as 4.5% in Ireland. By contrast, gross domestic product growth in Germany is expected to be more muted at 1.8% and flatter even still in France, at only 1.3%.

ECB stimulus seems to be making the difference and filtering through to the areas that need it most, consumers and businesses. Negative interest rates are forcing banks to lend more and QE is providing the cash to facilitate it. It is being reflected in improved lending rates in the eurozone, with consumer credit up 5.2% over the past year and mortgage loans up 2.3%. This is the best it has been for a long while.

Positive Territory

With credit conditions improving and employment trends on the mend, consumer spending and confidence are moving back into positive territory, especially in those countries which are more consumer oriented and more interest rate sensitive. It explains why Germany and France are lagging behind in the relative performance stakes. Their economies are more export dependent and more sensitive to adverse global trade headwinds.

The ECB must avoid jumping to hasty conclusions as the eurozone has not turned the corner yet. Germany’s ultra-cautious Bundesbank clearly favors an early policy taper, but the ECB must stick to its guns and keep monetary policy in super-stimulus mode for as long as possible–and especially while deep fiscal correction continues for Portugal, Ireland, Greece and Spain.

The ECB cannot afford to take any risks and that means interest rates will probably need to be cut again and QE operations should be left running for as long as possible. Eurozone interest rates will probably need to stay close to zero until at least the end of the decade. There have been wasted growth and employment opportunities that must be made up for.