The ECB is running out of time to revive euro zone
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Francesco Guerrera
LONDON, Aug 16 (Reuters Breakingviews) -Frankfurt, you have a problem. Business surveys and weakness in Germany suggest that euro zone growth may be flagging. With inflation still high, though, European Central Bank President Christine Lagarde faces a tough choice: keep rates elevated to tame rising prices or cut them quickly to avoid a possible recession. The second option looks best.
Until recently, Lagarde seemed to be safely piloting the bloc’s economy towards a “soft landing” – where inflation comes back down to the ECB’s 2% target and GDP keeps expanding. The 20 countries that share the euro have grown, in aggregate, at 0.3% a quarter for the past six months. Output held up even as tight monetary policy brought inflation down by more than half from last year’s bloc-wide average of 5.4%.
That rosy picture is under threat. A survey of 5,000 euro zone companies by S&P Global recorded the slowest growth in the region since March. And businesses were at their least optimistic about the next 12 months since January. The German ZEW index, which measures the difference between the percentage of financial market forecasters who expect economy to get better and those who think it will get worse, plummeted from 42 in July to 19 in August. Admittedly, smaller economies like Spain and Portugal are doing better, but Germany accounts for almost a third of euro zone’s GDP.
That represents a dilemma for Lagarde, who in June lowered rates for the first time since 2019 but has refused to commit to more cuts. She’s hesitant because the ECB isn’t convinced it has slayed inflation. Teutonic hardliners in its Governing Council point to the rise in headline inflation in July to 2.6% from 2.5% in June, and to stubbornly high services inflation, which was 4% last month.
Lagarde has to choose which prospect is scarier: risk a recession by holding rates high or risk an inflation comeback by cutting them too fast. Of the two dangers, an economic slump looks more troubling. The long period of high interest rates is choking off growth. Net interest payments for euro zone non-financial businesses are at the highest level since 2009, according to BCA Research. Employment growth is also stagnating, a worrying sign for household finances and domestic consumption.
Traders believe the ECB will see reason and embark on a raft of cuts. They are betting on euro zone interest rates being 2.5% by next June from 3.75% now, according to derivatives prices collected by LSEG. By then, the ECB expects inflation of 2.2% and annual GDP growth of 1.4% - a textbook “soft landing”. To get there, though, Lagarde will have to give more thrust to the economy with lower rates.
Follow @guerreraf72 on X
CONTEXT NEWS
The German ZEW economic sentiment indicator fell to 19 in August from 42 in July, the ZEW economic research institute said on Aug. 13.
The metric measures financial-markets participants’ expectations for key international economies. The participants include about 350 economic analysts from banks, insurance companies and large industrial corporations. Most of the analysts are from Germany.
Traders are betting on a series of ECB rate cuts Traders are betting on a series of ECB rate cuts https://reut.rs/4dnZup7
Editing by Liam Proud and Streisand Neto
Pinakabagong Balita
Disclaimer: Ang mga kabilang sa XM Group ay nagbibigay lang ng serbisyo sa pagpapatupad at pag-access sa aming Online Trading Facility, kung saan pinapahintulutan nito ang pagtingin at/o paggamit sa nilalaman na makikita sa website o sa pamamagitan nito, at walang layuning palitan o palawigin ito, at hindi din ito papalitan o papalawigin. Ang naturang pag-access at paggamit ay palaging alinsunod sa: (i) Mga Tuntunin at Kundisyon; (ii) Mga Babala sa Risk; at (iii) Kabuuang Disclaimer. Kaya naman ang naturang nilalaman ay ituturing na pangkalahatang impormasyon lamang. Mangyaring isaalang-alang na ang mga nilalaman ng aming Online Trading Facility ay hindi paglikom, o alok, para magsagawa ng anumang transaksyon sa mga pinansyal na market. Ang pag-trade sa alinmang pinansyal na market ay nagtataglay ng mataas na lebel ng risk sa iyong kapital.
Lahat ng materyales na nakalathala sa aming Online Trading Facility ay nakalaan para sa layuning edukasyonal/pang-impormasyon lamang at hindi naglalaman – at hindi dapat ituring bilang naglalaman – ng payo at rekomendasyon na pangpinansyal, tungkol sa buwis sa pag-i-invest, o pang-trade, o tala ng aming presyo sa pag-trade, o alok para sa, o paglikom ng, transaksyon sa alinmang pinansyal na instrument o hindi ginustong pinansyal na promosyon.
Sa anumang nilalaman na galing sa ikatlong partido, pati na ang mga nilalaman na inihanda ng XM, ang mga naturang opinyon, balita, pananaliksik, pag-analisa, presyo, ibang impormasyon o link sa ibang mga site na makikita sa website na ito ay ibibigay tulad ng nandoon, bilang pangkalahatang komentaryo sa market at hindi ito nagtataglay ng payo sa pag-i-invest. Kung ang alinmang nilalaman nito ay itinuring bilang pananaliksik sa pag-i-invest, kailangan mong isaalang-alang at tanggapin na hindi ito inilaan at inihanda alinsunod sa mga legal na pangangailangan na idinisenyo para maisulong ang pagsasarili ng pananaliksik sa pag-i-invest, at dahil dito ituturing ito na komunikasyon sa marketing sa ilalim ng mga kaugnay na batas at regulasyon. Mangyaring siguruhin na nabasa at naintindihan mo ang aming Notipikasyon sa Hindi Independyenteng Pananaliksik sa Pag-i-invest at Babala sa Risk na may kinalaman sa impormasyong nakalagay sa itaas, na maa-access dito.
