The ECB faces the dilemma of increasing the amount of its monetary policy
Friday, 16 of October 2015
This week focus
The ECB faces the dilemma of increasing the amount of its monetary policy amid fears that economic growth in the eurozone is slowing down. Leading economic indicators show that the eurozone economy remains in expansion path, but shows signs of slowing.
The slowdown is evident both on the side of the supply and the demand. Industrial production shows signs of having exhausted the stimulus of the depreciation of the euro against the USD and the JPY, after several months of improvement. Demand for goods and services, closely linked to job creation and wage improvements, neither signs of improvement beyond the replacement of certain durable goods (sales of new vehicles).
Companies do not see it so clear
In Germany, PMI manufacturing index stood at 52.3 in September from 53.3 in August, a level still expansive (one reading above 50 indicates growth), while the entire euro area became 52 from 52.3 the previous month. France, by contrast, spends 50 points for the second time since April 2014, with 50.6 in September (and earlier in June 2015, with 50.7).
Other indicators such as the PMI service in 54 points from 54.4 points in August, also show similar trends, with expansive readings gradually slowing.
And consumers either...
The confidence of European consumers is also reduced, affected by the negative income effect that is destroying value by falls in equity markets and the low performance provides savings in a context of wage moderation and high unemployment. Thus, in the euro zone unemployment remains at 11% of the workforce, with many differences between member countries.
In this environment, the need for monetary policy to stimulate consumption and investment, with negative rates low nominal and real interest (discounting inflation), it is postulated as essential to overcome the low economic growth. Low growth that occurs in the context of demographic stagnation and low propensity to consume, while production capacity remains at a much higher potential demand, downward noted in producer prices and partial use of the means of production.
The need to reduce debt, public and private, acting as counterforce to economic expansion curiously at the moment in recent history when it cheaper to borrow. However, data from credit growth to the private sector are lower than the growth rate of the money supply: ie the credit engine starts, but the transmission failed and the vehicle is not moving at the expected rate. For more money to be injected, the credit will not grow unless they change expectations.
The problem of overcapacity
The low global growth appears, then, that is shared by turns, first in USA, then in Japan and now in Europe through competitive devaluations and maintaining a level of emergency employment that does not alter too much the state of things. At the same time, trying to digest the volume of debt created during and after the financial crisis of 2008, fleeing a deflation that has its roots in the global excess capacity to the global inequality of income and wealth, slowing consumption poorest countries and social strata.
Particularly in the context of a G-20 little beyond and looking with concern the reorientation of China's economy and its terrible effects on the rest of the developed world if the Asian giant needs to take abrupt steps to avoid falling into social disorder.