Away from what’s going on in
Spain and Greece, let’s take a look ahead at next week’s ECB meeting. This week’s
key German business climate figure was awful and the significance of this will certainly
not have been lost on the ECB. With economic contraction throughout the periphery
weighing on growth in the eurozone’s powerhouse economy – will the ECB finally
put its deeply engrained fear of high inflation to one side and give Germany
and perhaps more importantly the rest of the eurozone a helping hand by
lowering interest rates?
A German contraction in Q3 is not
a certainty but it is now looking likely, particularly in light of the latest
German confidence figure, which hit its lowest reading since March 2010. Spain’s
central bank warned yesterday that its economy’s GDP continued falling at a “significant
rate” in Q3, while S&P forecasted that Spanish GDP will contract by another
1.4% in 2013 and the eurozone economy a whole will achieve zero growth. With conditions
so dire in Germany’s major eurozone trading partners, you don’t have to dig too
deep to find motivation for a rate cut.
Domestic consumption, which accounts
for around 60% of German GDP, is in good shape and consumer confidence remains
stable. Admittedly, other domestic German indicators such as the ZEW and PMI
surveys also suggested things are not so bad but we can probably put this down
to temporary positivity triggered by the ECB’s bond-buying plan. The German
business climate survey has built up a strong correlation with German GDP,
which leads us to believe a Q3 contraction is on the way. Weak exports are
likely to outweigh robust domestic demand.
Still, the ECB seems unlikely to
cut interest rates next week. The ECB appears to have already factored in further
weakness in eurozone growth; recently projecting a 2012 GDP contraction of
between -0.6% and -0.2%. This latest poor figure from Germany probably does
little to change the ECB’s approach. Indeed Draghi acknowledged a weaker
business cycle in his September ECB Press Conference.
In addition, the ECB’s Nowotny
has recently stated that he “sees no need to change interest rates in the
eurozone currently.” ECB policymakers have also been lauding the positive response
in the financial markets to the ECB’s bond-buying plan, suggesting they are
satisfied with the 0.75% interest rate at present. Draghi will also be eager to
keep the German ECB policymaker Weidmann on side by waiting until a rate cut is
absolutely necessary, when German growth has completely ground to a halt and
inflation has eased further. This is likely to happen later on in Q4, perhaps
in December. The euro is certainly feeling the pressure at present but it will likely
be spared the downside factor a rate cut for the time being.
Richard Driver
Currency Analyst
Caxton FX
