Eurozone picture dimming, no light at end of tunnel yet even for Germany

Tuesday April 23, 2013

Eurozone picture dimming, no light at end of tunnel yet even for Germany

LONDON: An early peek this week at how the eurozone economy performed in April could cement the case for the next instalment in an unprecedented campaign of monetary easing by the world’s major central banks. A preliminary survey of purchasing executives from the 17-country bloc is likely to furnish the new evidence of economic weakness that Jens Weidmann, the president of Germany’s hardline central bank, says is needed for the European Central Bank (ECB) to cut interest rates. The composite index derived from the survey by data providers Markit is likely to be unchanged at 46.5, well below the 50 threshold denoting expansion. The eurozone economy, in short, remains dead in the water.“We need more monetary stimulus. What that means to me is lower interest rates,” said Mark Zandi, chief economist at Moody’s Analytics.

Weidmann is among those who believe the ECB’s exact stance matters less than the fact that monetary policy is not being transmitted to all corners of the eurozone.

Borrowing costs on the struggling southern rim are thus much higher than in countries at the euro’s core.

Zandi agreed that cutting the ECB’s main 0.75% policy rate would not revive lending by banks, which badly needed strengthening. But lower interest rates would weaken the euro.

That would help exports, especially in Germany, which in turn was key to preserving popular support for emergency measures to stop the euro from breaking up, Zandi argued.

“The most important thing for keeping the eurozone together in the very near term is to make sure that the German economy remains solid and that unemployment remains low. You need the German population to be committed to the euro zone,” he said.

Germany’s export-orientated economy has held up better than most of its eurozone peers, but a monthly business survey by the Munich IFO economics institute is likely to show a dip, according to economists polled by Reuters.

“When you look at the latest signals from China and the United States, the export growth prospects of German companies have deteriorated significantly,” said Tobias Blattner, an economist with Daiwa Capital Markets in London.

As such, the ECB would be paying close attention to the latest purchasing managers’ indexes not just from the eurozone but from the bloc’s main partners. On a trade-weighted basis, these have fallen in the past couple of months.

Blattner expects a rate cut at May’s ECB meeting. Although most ECB policymakers doubt it would make much difference, he said the symbolism would fan expectations of additional, less conventional steps to spur lending to the periphery.

“They all know that it needs to be accompanied, at the same time or possibly a month later, by some further nonstandard measures,” he said. “That’s important. You cut rates and people say the next step must be something that will have an impact.” Reuters