Eurozone growth slows in Q2, inflation cools in spur for ECB
A round of extra policy easing, including restarting QE on cards
BRUSSELS: Eurozone economic growth halved in the second quarter and inflation slowed sharply in July, reinforcing market expectations that the European Central Bank will further ease monetary policy in September.
The European Union’s statistics office said yesterday that gross domestic product in the 19 countries sharing the euro grew 0.2 percent quarter-on-quarter in the AprilJune period, down from 0.4 percent in the previous three months and returning to the anemic rates seen in the third and fourth quarters of last year.
Inflation, which the ECB wants to keep below, but close to, 2 percent, also slowed to 1.1 percent year-on-year in July from 1.3 percent in June - the lowest reading in 17 months. “We expect the ECB to respond to this broadbased economic weakness - which we think is likely to continue - with a round of extra policy easing, including restarting QE and cutting rates,” said Daniele Antonucci, economist at Morgan Stanley.
Core inflation, which strips out volatile unprocessed food and energy and which the ECB scrutinizes in policy decisions, also fell to 1.1 percent in July from 1.3 percent in June. The even more narrow measure excluding also alcohol and tobacco prices that many market economists look at was down to 0.9 percent from 1.1 percent, strengthening the case for a package of ECB measures to support the economy and faster inflation.
“The ECB more or less announced what it will do - cutting rates, probably restarting QE and putting in place the tiering system for the banks,” said Peter Vanden Houte, chief economist at ING. “The big question is if all of this will have much of an impact on both inflation and growth as we are starting to get to the limits. Now it’s up to governments with more pro-active fiscal policy to step in as the ECB cannot do it alone.” The slower price growth comes even though the unemployment rate fell to 7.5 percent of the workforce, its lowest in 11 years, data showed.
Antonucci said the inflation and growth data, with downside risks for both, provided clear grounds for the ECB to push through a new package of measures as soon as September. The ECB’s Governing Council holds its next monetary policy meeting on Sept. 12.
“That’s likely to include a 10 basis point deposit rate cut to -0.50 percent, plus an announcement or a strong hint that the central bank will restart net asset purchases,” he said. Economist Jack Allen Reynolds of consultancy Capital Economics said the weak data would strengthen the case of the ECB to announce “stimulus measures” at its meeting in September.
Last week, the bank signalled that it could lower its already negative interest rates even lower and bring back its multi-billion-euro quantitative easing program. “But while economic weakness had previously been concentrated in Germany and Italy, the national data available so far show that the slowdown in Q2 was broad based,” Reynolds said. Growth is also now softening in France, Spain, Austria and Belgium, he warned. And even the improved unemployment figure could mask underlying economic weakness, he argued. “Surveys of firms’ hiring intentions suggest that employment growth will lose pace, while other surveys show that labor shortages are easing. So we doubt that wage growth will continue to accelerate,” he said. — Agencies