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Ahead of ECB, evidence mounts of weak recovery

November 6, 2013
Associated Press

LONDON (AP) — A day before the European Central Bank meets to decide whether to cut interest rates, further evidence emerged Wednesday to indicate the economic recovery in Europe is muted.

Eurostat, the EU's statistics office, said Wednesday that retail sales across the 17-country eurozone fell 0.6 percent in September from the month before. The fall offset the previous month's 0.5 percent rise and was just below market expectations for a more modest 0.4 percent decline.

September is the final month of the third quarter, so the drop may alter expectations about how much the eurozone grew during the period.

Markit, the financial information company, also revealed that its composite purchasing managers' index, a broad gauge of economic activity, faltered in October.

While the October PMI reading of 51.9 points was revised up from the initial estimate of 51.5, it was down from September's 27-month high of 52.2. Still, it's above the 50 threshold indicating expansion.

Though the figures continue to point to a second straight quarter of growth for the economy of the 17 European Union countries that use the euro, they suggest the recovery lacks strength and is vulnerable to setbacks. Whether that will be enough for the ECB to cut its main interest rate to a record low of 0.25 percent on Thursday remains unclear.

"The loss of momentum raises concerns that the upturn is faltering and piles further pressure on the European Central Bank to reinvigorate the recovery," said Chris Williamson, chief economist at Markit.

Williamson noted that the economic backdrop has been complicated by the fall in the eurozone's consumer price inflation to a near four-year low of 0.7 percent in October, which has raised concerns about deflation — a prolonged drop in prices — taking hold. The ECB is tasked with setting policy to keep inflation at just below 2 percent.

But with interest rates already at record lows, ECB policymakers will be gathering in Frankfurt knowing they have few traditional monetary policy tools left to shore up the recovery. The ECB has been reluctant to inject cash in the economy to stimulate growth the way the Federal Reserve has done. A rate cut may also not do much good since banks are still too worried about the economy to lend at low costs.

As such, many economists think the ECB will hold off a rate cut and revisit the issue in December, when it will be armed with its staff's latest quarterly economic projections.

Analysts at Bank of America Merrill Lynch say it's a close call, but expect the ECB to cut the main interest rate Thursday.

"Not doing so could risk being perceived by markets as never be willing to venture into this territory," they said in a note to clients.

Hopes of a rate cut helped shore up European stock markets Wednesday. The Stoxx 50 index of leading eurozone shares was up 0.5 percent by midday.

Even if a rate cut doesn't materialize, recent figures have dashed hopes that the recovery from the eurozone's recession would gather velocity. With many countries, such as Greece and Spain, still facing record unemployment and imposing austerity cuts, those hopes now appear overdone.

Next week, Eurostat figures are expected to show the eurozone grew again in the third quarter, but few economists think growth will outstrip the 0.3 percent quarterly rate recorded in the April to June period. That second-quarter growth was the first since late 2011, the longest recession to afflict the single currency zone since its creation in 1999.

 
 

 

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