ECB Preview

October 5, 2011

ECB President Trichet’s last monthly conference after eight years at the helm comes at a time of great controversy for the common currency area and the ECB.

Economic growth has stalled abruptly.  Between March and September, the manufacturing purchasing managers index swung from a robust 57.5 to a contractionary reading of 48.5.  That deterioration was mirrored in services, where the PMI dropped from 57.2 to 48.8.  All members, including Germany and France, have seen conditions worsen rapidly.  Economic sentiment between June and September meanwhile dropped 10.4 points to 95.0, with similar declines of 9.3 points in consumer sentiment, 9.4 points in industrial confidence, and 10.1 points in services.  Euroland’s jobless rate of 10.0% is even higher than America’s.

The euro zone is grappling with life-threatening issues, exemplified by the likely default of Greece before yearend, the danger of contagion that saw Moody’s downgrade the Italian sovereign debt rating by three notches today, and endless disputes over how to enlarge the EFSF war chest to support trouble members.

Some analysts think the ECB might cut interest rates now.  That’s not the majority view however.  CPI inflation of 3.0% in September was over a percentage point above target.  Money and credit growth do not warrant a rate cute.  Labor cost growth increased to 3.6% in the second quarter from 2.7% in the first quarter.  July industrial production was 4.2% higher than a year earlier and 0.5% greater than the average 2Q level.  A month ago, the ECB staff released new forecasts projecting growth of 0.4 – 2.2% next year along with inflation of 1.1 -2.2%.  The ECB has hardliners, who have been dissatisfied with the unconventional provisions of liquidity.  Stimulus from such non-standard tools will be a likelier response to weakening economic growth than a cut of the 1.5% refinancing rate.  It was increased in July, so a cut this soon afterward would carry an implicit acknowledgement that the July tightening was a mistake.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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