Economy

Deepening economic pain leaves ECB in policy dilemma

Published

1 year ago

June 24, 2023

Euro zone business growth stalled this month as a manufacturing recession deepened and a previously resilient services sector barely grew, leaving the European Central Bank in a policy dilemma as it presses ahead with rate hikes to fight inflation.

HCOB’s flash Composite Purchasing Managers’ Index for the 20 nations sharing the euro currency, compiled by S&P Global and seen as a good gauge of overall economic health, sank to a five-month low of 50.3 in June from May’s 52.8.

That was barely above the 50 mark separating growth from contraction and below all forecasts in a Reuters poll that saw a modest decline to 52.5.

The figures suggest that the bloc’s economy is at best stagnating after a recession in the previous two quarters and a recovery is nowhere on the horizon, even if robust holiday bookings suggest that the tourism sector could keep the bloc afloat in the near term.

“This speaks against a recovery of the economy in the coming months, which is expected by many,” Commerzbank economist Christoph Weil said. “We see our assessment confirmed that the euro area economy will contract again in the second half of the year.”
“The so far 400 basis points of ECB rate hikes are increasingly slowing down the economy,” he added.

For the ECB, the data deepen a dilemma.

Inflation at just over 6% is far too high and the labour market is running hot, suggesting more price pressures ahead as workers enjoy improved bargaining power.

But economic activity is weak and the ECB has clearly failed in its goal of tightening policy just enough to contain price pressures without pushing the bloc into recession.

Another issue is that a recession would normally push up unemployment, making the bank’s job easier.

But firms appear to be hoarding labour, keenly remembering how difficult it was to hire back workers after the pandemic and offering the ECB little relief.

Indeed, the jobless rate is at a historic low and nominal wage growth is at its highest in decades, even if wages are just catching up after inflation eroded their real value.

Friday’s PMI data only confirm this trend, as firms still increased headcount this month, with the employment index at 54.1, somewhat below May’s 54.6.

For now, policy hawks who fear inflation more than a recession, appear to be in a majority.

“Another quarter of negative GDP growth is not unimaginable, although the current slump clearly remains mild enough for the European Central Bank not to change course on rate hikes,” ING economist Bert Colijn said.

The ECB has de facto promised a rate hike in July and quite a few policymakers have also put one more move, to 4%, on the table for September or October.

Friday’s real surprise was that PMI data covering the services industry slumped to 52.4 from 55.1, well below a median forecast of 54.5.

While Germany, the bloc’s biggest economy, outperformed on services, France was a big drag with a services PMI at 48.

Manufacturing activity has been in decline since July and the downturn deepened this month with the euro zone factory PMI dropping to 43.6 from 44.8, also below all forecasts in the Reuters poll and its lowest since May 2020 when the COVID pandemic was cementing its grip on the world.

Germany, with its oversized manufacturing sector, was a drag on the bloc as its own manufacturing PMI fell to 41.0 from 43.2, hitting a 37-month low.

Economy

Russian central bank says it needs months to make sure CPI falling before rate cuts -RBC

Published

9 months ago

December 26, 2023

Russian central bank says it needs months to make sure CPI falling before rate cuts -RBC

MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.

The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.

Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.

“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.

Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.

“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.

The bank will next convene to set its benchmark rate on Feb. 16.

The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.

Economy

China identifies second set of projects in $140 billion spending plan

Published

9 months ago

December 25, 2023

China identifies second set of projects in $140 billion spending plan

© Reuters. FILE PHOTO: Workers walk past an under-construction area with completed office towers in the background, in Shenzhen’s Qianhai new district, Guangdong province, China August 25, 2023. REUTERS/David Kirton/File Photo

SHANGHAI (Reuters) – China’s top planning body said on Saturday it had identified a second batch of public investment projects, including flood control and disaster relief programmes, under a bond issuance and investment plan announced in October to boost the economy.

With the latest tranche, China has now earmarked more than 800 billion yuan of its 1 trillion yuan ($140 billion) in additional government bond issuance in the fourth quarter, as it focuses on fiscal steps to shore up the flagging economy.

The National Development and Reform Commission (NDRC) said in a statement on Saturday it had identified 9,600 projects with planned investment of more than 560 billion yuan.

China’s economy, the world’s second largest, is struggling to regain its footing post-COVID-19 as policymakers grapple with tepid consumer demand, weak exports, falling foreign investment and a deepening real estate crisis.

The 1 trillion yuan in additional bond issuance will widen China’s 2023 budget deficit ratio to around 3.8 percent from 3 percent, the state-run Xinhua news agency has said.

“Construction of the projects will improve China’s flood control system, emergency response mechanism and disaster relief capabilities, and better protect people’s lives and property, so it is very significant,” the NDRC said.

The agency said it will coordinate with other government bodies to make sure that funds are allocated speedily for investment and that high standards of quality are maintained in project construction.

($1 = 7.1315 renminbi)

Economy

Russian central bank says it needs months to make sure CPI falling before rate cuts -RBC

Published

9 months ago

December 25, 2023

Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.

“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.

Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.

“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.

The bank will next convene to set its benchmark rate on Feb. 16.

The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.