Economist
EARLIER
this year, a genuine revival in the euro area appeared to be under way.
European equity markets were buoyant and consumers had become more confident.
The recovery, which had been faltering and feeble since the spring of 2013,
looked set to accelerate. That bout of optimism has proved fleeting and there
is now increasing doubt about whether the euro area can pull itself out of a
rut of low inflation and sluggish growth. The European Central Bank (ECB) is
not expected to act on September 3rd when its governing council meets. But it
may well indicate a preparedness to provide more stimulus, if necessary.
Even before
the recent panic in financial markets about the Chinese economic slowdown, the
euro-zone recovery was losing momentum. After growing by 0.4% in both late 2014
and early 2015, GDP increased in the second quarter by 0.3%. Annualised, that
was a pace of 1.3%, barely a trot compared with America Spain , the
fourth-biggest economy in the currency club, has continued to do well, the euro
area was held back by the stagnation of France
Better news
came in the form of unemployment falling from 11.1% in June to 10.9% in July,
some way off its high of 12.1% in early 2013. However, the range in
unemployment, from 4.7% in Germany
to 22.2% in Spain and 25% in
Greece Italy fell sharply in July, it edged up in France
Unemployment
generally lags the economic cycle. Business surveys, which provide more
up-to-date readings of activity, point to a continuing subdued recovery. The
European Commission’s long-running economic-sentiment indicator, which combines
business as well as consumer confidence and tends to track GDP, has been
broadly stable since picking up in early 2015. This suggests that the euro area
is not about to break out of its holding pattern of unspectacular growth.
This is
worrying because the euro-zone economy is benefiting from a powerful triple
stimulus. Lower energy costs caused by the slump in global oil prices have been
providing broadly the same effect as a tax cut. A big programme of quantitative
easing (QE), has been under way since March under which the ECB is creating
money to buy €60 billion ($67 billion) of bonds each month. As well as pushing
down long-term interest rates QE has helped to keep the euro down on the
currency markets to the benefit of exporters.
Given the extent
of help that the euro area has been getting, growth should be faster. The
sluggish performance leaves it vulnerable to China Germany China
Lacklustre
growth in the euro area will in turn make it harder for the ECB to meet its
goal of pushing inflation back towards its goal of almost 2%. Although core
inflation (excluding in particular energy and food) has moved up from its low
of 0.6% earlier this year, to 1.0%, headline inflation has been stuck at 0.2%
over the summer. There is increasing concern that the ECB’s efforts to break
the grip of “lowflation” will be swamped by global deflationary effects.
The ECB’s
council is not expected to make a change in policy when it convenes on
Thursday. But when Mario Draghi, the central bank’s president, talks to the
press after the meeting, he is likely to indicate that the ECB recognises the
downside risks to growth and stands ready to respond if they materialise. That
may in turn produce a policy easing later this year. One option would be to
raise the amount of assets that it is buying each month from the current amount
of €60 billion. A more likely decision would be for the ECB to extend the
planned length of its purchase programme beyond September 2016. Whether that is
enough is a question for another day.
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