Will orthodox economists now admit they spoke too soon of Eurozone recovery? #NotAMystery
2018 api. 16
The mystery of the eurozone slowdown
After spurt last year the economy has suddenly fallen behind the rest of the world
The global economy entered 2018 apparently locked in a period of strong and synchronised growth, with all of the major geographical blocs breaking free of the constraints that had dogged previous growth spurts since 2010. While that may still be the case, optimism has been dented by a sudden and rather sharp downturn in activity in the eurozone, a region that had until recently been leading the global expansion. (,,,)
This slowdown has come as a definite surprise to the ECB forecasters, who expected the growth rate to slow only slightly in the course of 2018. The latest ECB Economic Bulletin in March suggested that the annualised GDP growth rate in the first and second quarters of 2018 would be around 2.5 per cent and the March Governing Council minutes expressed a high degree of confidence that the forces that had caused the upswing in 2017 would prove long lasting. They argued that the risks around their optimistic growth forecasts were balanced, although they did express some concern about the potential for a negative impact from global trade conflicts.
Why has this downside surprise happened? The fact that activity growth in the US and China have not experienced the same degree of slowdown as the eurozone suggests that the global economic expansion probably remains broadly intact. Nor has there been any major slowdown in export orders or sentiment that might indicate that the rising euro is mainly to blame for the slowdown. Some observers think that the bad news stems from temporary special factors, such as extreme weather and the influenza outbreak. Others suggest that the outcome of coalition talks in Germany have dented business confidence.
But I have not seen any really firm evidence in favour of these views. The breadth of the slowdown across Europe, and the fact that survey data and hard economic data have both fallen, suggests that there might be something more important going on. (…)
Up to now, there has been no compelling fundamental narrative that would account for the eurozone slowdown. But there are two possible candidates.
The first is that the effects of the ECBs belated shift to quantitative easing in January 2015 have now started to wane. Although this policy change did not involve a large drop in real policy rates, it did succeed in reducing bank lending rates and bond yields throughout the eurozone, and also restored the provision of bank credit in the troubled economies. (…)
A second possible explanation is that the growth rate during 2017 was simply too far above the long run growth rate for this situation to be sustainable indefinitely. Supply constraints may have started to bite. (…)
There is probably some truth in the weather-related hypothesis, in which case some improvement in growth is likely in the next couple of months. But if either of the two more fundamental explanations — waning monetary policy effects or supply side constraints — proves valid, then the growth rate in the eurozone will disappoint both market and ECB projections this year. (…)
The ECB will probably give the economy the benefit of the doubt at the next Governing Council meeting on 26 April. It has been very confident that a strong, above trend upswing will continue this year, and will be reluctant to change their assessment based on a couple of months’ data.
The ECB has clearly been intending to end its programme of asset purchases well before the end of 2018, but a combination of fading growth and stable inflation could make it increasingly difficult for it to achieve this objective.
Warren B. Mosler @wbmosler
Honi erantzuten: @PatriciaNPino
No discussion about how negative rates and QE from the ECB have slowed things down via the interest income channels (fiscal tightening)? 😉
2018 api. 16