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Nov 5, 2014 8:34 AM

ECB to sit tight despite fragile economy

The Associated Press

FRANKFURT, Germany (AP) The sobering economic news just keeps coming, yet the European Central Bank appears stuck in wait and see mode held up by policy disputes and a desire to see whether recent stimulus measures are working.

A day ahead of the bank's monthly meeting in Frankfurt, the ECB's 24 policymakers were confronted Wednesday with more evidence that the 18-country eurozone could sink back into recession.

Analysts think ECB President Mario Draghi will use his news conference Thursday to underline the bank's willingness to step up its efforts if things get worse. He may find some relief from the continuing slide of the euro against the dollar and the sharp retreat in oil prices. A weaker currency can boost growth by lifting exports, while cheaper energy can cut consumers' fuel bills.

For now, the economic backdrop remains uninspiring at best.

On Wednesday, financial information company Markit said its monthly purchasing managers' index or PMI, a broad gauge of business activity rose a bare 0.1 percentage points in October to 52.1. The index still points to very modest growth of around 0.2 percent on a quarterly basis. Anything above 50 indicates expansion.

"The eurozone PMI makes for grim reading, painting a picture of an economy that is limping along and more likely to take a turn for the worse than spring back into life," said Chris Williamson, Markit's chief economist.

He noted there was a fall in the employment indicators in the survey for the first time since last November, casting a further shadow over the outlook at a time when employers are seeing profit margins squeezed by weak prices. A big concern the ECB faces is that low inflation could turn into a debilitating bout of deflation that could weigh on growth as consumers delay spending in hopes of cheaper goods down the line.

And consumers are already under pressure. Retail sales in the eurozone slumped 1.3 percent in September, with powerhouse economy Germany posting a 3.2 percent plunge, the Eurostat statistics agency said Wednesday.

Some sort of fall in sales had been anticipated following August's 0.9 percent rise, but the scale of it was a disappointment the consensus in the markets was for a more modest 0.7 percent decline.

Despite the continuing negative news, few economists think the ECB is ready to use up the dwindling policy tools it has at its disposal.

The ECB's benchmark interest rate its typical tool for steering the economy has already been cut as far as it can go, to a record low 0.05 percent. That in theory lowers borrowing costs for households and for businesses. It is also offering ultra-cheap loans to banks, tied to their lending to companies. And it has started buying bonds backed by the principal and interest payments on bank loans, a step it hopes will encourage more lending.

The more activist monetary policy pursued by the ECB in recent months is intended to help the eurozone cement an economic recovery after a debt crisis that has led governments to cut spending and raise taxes.

Yet the eurozone saw no growth in the second quarter and few economists think figures for the July-September period will be much better when they are released on Nov. 14.

Draghi has said the ECB can do more if the situation worsens. The biggest weapon left would be a monetary stimulus through massive bond purchases, called quantitative easing or QE, similar to the ones the U.S. Federal Reserve ended last week. The Bank of Japan last week stepped up its own purchases.

The practice, which involves creating new euros and pumping them into the economy, is meeting with resistance in some quarters. QE is not as easy a call in Europe as it was in Japan and the U.S.

For one, it's more complicated to buy government bonds in an 18-country currency union. It also faces opposition among many officials and economists in Germany, the eurozone's dominant political and economic force. One reason is that QE could ease pressure on governments in weaker countries to reduce burdensome bureaucracy and excessive worker protections and make their economies more business friendly and encourage growth.

Skeptics include Jens Weidmann, the head of Germany's Bundesbank central bank and a member of the ECB's rate-setting council.

"Political hurdles to sovereign QE remain significant, but ECB's policy will be driven by the data," said Frederik Ducrozet, eurozone economist at Credit Agricole.


Pylas contributed from London.


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