Euro growth slows as global economies feel the drag

The eurozone is unlikely to bounce back to strong growth this year, reports have shown [Xinhua]

The eurozone is unlikely to bounce back to strong growth this year, reports have shown [Xinhua]

The European Central Bank’s quantitative easing (QE) stimulus program has produced positive results for the eurozone economies, but a slowing of growth in June – in particular in Germany – has eroded some investor confidence and led to a drop in stock prices on the continent.

On Friday, financial information provider Markit published its composite purchasing managers index (PMI) which showed a slowdown from 54.2 in June to 53.7 in July.

The composite PMI measures manufacturing and services activity in the eurozone, and factors in new manufacturing orders, the level of inventory, manufacturing production, supply, and employment.

A reading above 50 indicates expansion, while a reading below 50 represents contraction.

By the end of trading on Friday, London’s FTSE 100 fell 1.13 per cent; Germany’s DAX tumbled 1.43 per cent and the French CAC40 lost 0.60 per cent.

The Greece slip

Markit’s chief economist Chris Williamson said that the eurozone’s economic growth lost only slight momentum in July amid the uncertainties of the Greek debt crisis earlier in July.

“The rate of expansion remained reassuringly robust to suggest that it was by-and-large ‘business as usual’ for the region as a whole,” he said in a press release.

However, Markit data appears to show that “business expectations about the year ahead in the dominant services economy dropped to the lowest seen so far this year”.

There is particular lower confidence in the the German and French economies in what Markit says is a “sign that the [Greek] crisis appears to have dented
business prospects”.

Does this mean that the ECB’s QE has failed?

It’s much too early to tell; most analysts believe that the central bank’s efforts are working, albeit not quickly enough.

The current QE plan, which involves the ECB buying back 60 billion euros ($65 billion) every month until the program terminates in September 2016 – a total stimulus of 1.1 trillion euros, was welcomed by eurozone markets when it went into effect in March.

It was then seen as the last-ditch effort by ECB head Mario Draghi to raise inflation to a healthy level of two per cent, lower the value of the euro to make investing in the zone lucrative, and end Europe’s recession.

Essentially, the ECB will buy back government bonds that were purchased by the banks. This in turn creates more money in circulation in the Eurozone economies.

It is tantamount to printing more money and is used by most advanced nations as a means to revitalizing the economy when existing monetary policy proves to be inadequate.

The bond-buying – or QE – mechanism therefore provides banks with more funds to use for loans to finance projects and fuel investment

Coupled with lower-than-expected global oil prices at the end of 2014, by the time the QE began in March it produced immediate results.

Draghi has hinted QE could be extended past the 2016 date.

Global stagnation?

But it isn’t the eurozone alone that is navigating troubled waters.

Although there has been noticeable growth and a drop in unemployment in the US economy, it still hasn’t reached the pre-2008 financial crisis levels. The Federal Reserve has held off raising interest rates preferring instead to revisit the issue on a month-by-month basis.

A US Department of Commerce report on Friday showed that the sales of new single family homes fell to their lowest level since November 2014.

Home resales, however, reached an 8.5-year high.

Nevertheless, US stocks plunged on Friday – also due to lower tech performance and the disappointing PMI data in China.

The Dow Jones Industrial Average fell 2.9 per cent; the Nasdaq dropped 1.12 per cent and the SP 500 fell just over one per cent.

It’s not an encouraging picture and, if the Organization for Economic Cooperation and Development (OECD) is to be believed, troubled times lie ahead.

In its annual report published on July 9, the OECD said that the pace of global economic growth was too slow and that rampant unemployment in many of the developed countries was still too high.

It said that there were now 10 million more unemployed people among its 34-member states than in 2007.

Caterpillar, the world’s largest manufacturer of construction equipment, went a step further in its second quarter earnings report; it called the global economy stagnant.

By Firas Al-Atraqchi for The BRICS Post

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