The euro zone’s fragile economic recovery came to a halt in the second quarter, in marked contrast to the United States, where the economy grew robustly. Like many of its neighburs struggling to rebound from the debt crisis, Italy slipped into recession for the third time since 2008.
An inflation rate of just 0.3 percent, coupled with the lack of economic growth, has given new urgency to the bloc’s search for growth. The ECB is urging governments to also do their part and enact ambitious structural reforms.
Mario Draghi, president of the European Central Bank, announced that the bank plans to engage in a form of quantitative easing through the purchase of private sector credit, including asset-backed securities and covered bonds, in addition to a new cut in interest rates (the benchmark refinancing rate has been cut from 0.15% to 0.05% and the deposit rate has been cut from -0.1% to -0.2%).
McKinsey looked at the impact of quantitative easing and ultralow interest rates.
Nonfinancial corporations—large borrowers such as governments—benefited by $710 billion as the interest rates on debt fell. Although ultra-low interest rates boosted corporate profits in the United Kingdom and the United States by 5 percent in 2012, this has not translated into higher investment, possibly as a result of uncertainty about the strength of the economic recovery, as well as tighter lending standards. Meanwhile, households in these countries together lost $630 billion in net interest income, although the impact varies across groups. Younger households that are net borrowers have benefited, while older households with significant interest-bearing assets have lost income
An analysis found that QE contributes to a reduction in unemployment in the USA and Japan, and a rise in inflation expectations in the USA, the UK, and Euro area. However, evidence of the QE’s effect on house prices, stock prices, consumer confidence, and exchange rates is mixed and thus inconclusive. It does seem monetary policy alone is not enough, without some structural reforms and other policy measures.
As of July 2014, the unemployment rates for Greece (27.2%), Spain (24.5%), Italy (12.6%), and even France (10.3%) remained in double digit territory as the Euro area weighted average unemployment rate was left at 11.5%. This is in stark contrast to the U.S. and Germany who now have unemployment rates of 6.1% and 5.1% respectively following much stronger economic recoveries relatively untarnished by major debt crises
The ECB wants to return the size of its balance sheet to what it was at the start of 2012 when the balance sheet was at €3 trillion or $3.94 trillion (the balance sheet currently sits at just over €2 trillion). This implies a possible €1 trillion ($1.29 trillion) expansion embodied in the new stimulus measures.
The euro fell 1.6% against the U.S. dollar to a 14-month low of $1.29, in-line with the ECB’s implicit goal of weakening the currency.
China had a weak August Industrial Number and likely will have to lower interest rates
China’s industrial output growth in August slipped to the lowest level since the 2008 global financial crisis.
Value-added industrial output in China rose 6.9% in August from a year earlier, slowing sharply from a 9.0% increase in July, and below economists’ expectations of 8.7% growth, official data showed Saturday. In particular, electricity output – a closely watched economic indicator by the central government – dropped 2.2% from a year earlier in August.
The property market continues to struggle as home buyers expect further price cuts. Housing sales in China in the first eight months of the year fell 10.9% to 3.43 trillion yuan ($559 billion), following a drop of 10.5% in the first seven months of the year.
Although officials, including Premier Li Keqiang, have recently stressed that growth is reasonable and under control, the health of the world’s second-largest economy looks much worse than some had expected.
Before this data, I thought there was a 10% chance of a broad interest rate cut. But when you see this terrible IP data in August, I see a 50% chance for a broad general rate cut. I think they need to do something a little more aggressive. –Larry Hu, Macquarie Group
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Brian Wang is a Futurist Thought Leader and a popular Science blogger with 1 million readers per month. His blog Nextbigfuture.com is ranked #1 Science News Blog. It covers many disruptive technology and trends including Space, Robotics, Artificial Intelligence, Medicine, Anti-aging Biotechnology, and Nanotechnology.
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