Euro zone

Adjustment of the deposit facility with undesirable side effects

Negative interest rates, with the deposit facility having been at -0.4% for quite some time now, have more or less become normality in the euro zone. Initially the negative interest rates were intended to stimulate banks to grant more loans, which has also proved partially effective. In the meantime, this positive effect has largely disappeared. What remains is something akin to a special tax for banks and companies in the euro zone that is diminishing international competitiveness, particularly in the banking sector. The ECB is now evidently starting to feel a little uneasy as well. This may also be attributable to the fact that the central bank has now also written off the prospect of an imminent change in interest rate policy. The ECB is now faced with the problem of negative interest rates remaining indefinitely or, if economic momentum were to decelerate even further, of key interest rates being…

Euroland industry stuck in reverse gear

The stabilisation in the Euroland economic outlook that had seemed nascent since the beginning of 2019 is at risk from the ongoing difficulties in the industrial sector. This is shown by the current development of DZ BANK’s Euro-Indicator. Our economic leading indicator dipped again in March, by 0.2 percent, having recovered slightly in January and February 2019. While almost half of the individual indicators that feed into the computation of the Euro-Indicator tended at least slightly positively in the past month, the industrial sector made a clearly negative contribution. The deterioration in manufacturing purchasing manager sentiment had a particularly unfavourable effect. According to the Markit survey, in March the EMU industrial sector saw the largest business losses in almost six years. Moreover, production expectations in manufacturing have fallen for the fourth consecutive time. Amongst private households, by contrast, an essentially upbeat sentiment prevails. While they likewise do not rate the…

Easter effect squeezes Euroland inflation rate slightly to 1.4 percent

The Euroland inflation rate hardly moved in March. According to Eurostat’s preliminary calculations, consumer prices were 1.4 percent up on the prior-year month. In the previous month, the annual rate had been slightly higher at 1.5 percent, whereby the eased upward pressure is attributable to service sector prices. This is possibly caused by the comparatively late date for Easter this year, namely 21 April. This is also discernible in the core rate, which excludes the more volatile elements of food and energy prices and fell 0.2 percentage points to 1.0 percent. Last year, Easter was on 1 April and the Easter holidays therefore largely began as early as March. Prices in the hotel and accommodation segment as well as for transport services were thus accordingly higher in March 2018. This then brakes the climb in service prices in March 2019. And it also means, of course, that we can expect…

ECB loses its compass

The ECB is once again confronted by a problem: Inflation and in particular inflationary expectations are falling in the Eurozone. For example, the flash estimate for German inflation in the month of March amounted to 1.5% (Y/Y), which was below our forecasts. Inflationary expectations for the EMU have truly plunged recently, and currently lie at around 1.3%, or the same as the nadir of 2016, when the ECB ramped up its QE programme to EUR 80 bn per month. The core rate of inflation, which excludes the components of energy and food, has been oscillating between 1% and 1.2% for years. In other words, the prolonged upturn phase has not been reflected in inflationary developments. The reaction function of the ECB is essentially rooted in changes in inflationary and growth expectations. Accordingly, the ECB should actually be cutting interest rates now in order to ward off the threat of deflation…

Brexit – a synonym for political failure

None of the eight Brexit alternatives that were put to the vote yesterday in the lower house of the British Parliament was able to command a majority. The initiatives in favour of a customs union and a so-called “confirmatory vote,” in which population would have the last word on any agreement with the EU, attracted the most support. So the Brexit drama drags on, fuelling doubts about the UK’s political institutions. It is hard to imagine a more compelling sign of political failure. It would hardly be surprising if disenchantment with politics were to increase as a result. We still continue to assume there will be an orderly Brexit. However, there is an increasing likelihood that the United Kingdom will leave the EU on 12 April in a disorderly process. The warnings about the consequences that would follow this that are coming not only from the British economy, but also…

Downturn in Euroland industry intensifies – purchasing managers remain sceptical

The Euroland economy looks to have only expanded modestly in the first quarter, or so the renewed dampened sentiment among European purchasing managers would suggest. According to IHS Markit’s survey of European purchasing managers, the index for industry saw the strongest decrease in six years. The service sector proved more resilient thanks to robust domestic demand, but here, too, the figure fell. On balance the composite PMI dipped 0.6 points to 51.3 points in March. Industry in Germany and France were in decidedly poor spirits. In France, sentiment among service providers has also deteriorated. In the remainder of the Eurozone, according to IHS Markit, sentiment by contrast brightened slightly. Nevertheless, the survey results are a disappointment. They certainly do not speak in favour of Euroland economic growth picking up clearly in first-quarter 2019. This is in line with our forecast. According to the survey among purchasing managers, German industry is…

1 2 3 46