In spite of a number of positive economic indicators out of the Eurozone (see example), credit growth remains the area’s Achilles’ heel. The latest private sector loan growth aggregate from the ECB shows an annual decline of 1.8% (adjusted for sales and securitization – see press release). Here is what it looks like for the area’s households and corporations.
As discussed back in September (see post), the ECB may be forced to take further action in an attempt to reignite the area’s recovery. The central bank’s consolidated balance sheet is continuing to decline and many are blaming this reduced liquidity fo…
The euro area may be facing renewed deflationary pressures. Inflation measures are now near multi-year lows and falling.Source: Investing.comThe area’s already uneven economic recovery has stalled in a number of countries. We’ve seen the French GDP gro…
Germany’s trade figures continue to surprise to the upside. The latest merchandise trade number came in at €18.9bn, while according to Econoday, economists were expecting €15.5bn.
The question of course is how does Germany do this given that it is competing directly with Japan in global markets. And Japan has had one key advantage – a weakening currency, which makes its product cheaper. The chart below shows the value of the euro in terms of yen (EUR/JPY), with the euro now at recent high against the yen.
Is there a different product mix between Germany and Japan? Certainly. But according to CIBC the product overlap with Japan is the highest for Germany vs. other Eurozone nations. Machinery, electronics and cars represent a substantial component of both nations’ exports.
So how does Germany compete so successfully in spite of this currency disadvantage? The answer seems to be that Germany can compete on brand strength even at higher prices.
CIBC: – The [euro] strength against the yen will persist, a challenge largely for German exporters as they compete closely in areas such as autos and electronics. However, with many consumers prepared to pay a premium for German engineering, its exports are often less sensitive to price changes.
Indeed when compared with its Eurozone peers, German exporters boast the least price-sensitive merchandise. For example, a 10-20% higher price on a high-end German car is less likely to motivate someone to switch to a Japanese car – particularly in markets like China.
Going forward, German firms will be getting some tailwinds from Mario Draghi’s accommodative monetary policy. The ECB overnight rate is now at record low. That should limit the euro’s appreciation and provide some price stability for German exporters.
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Over the past year, the ECB’s (Eurosystem’s) consolidated balance sheet declined roughly three quarters of a trillion euros. As discussed earlier (see post) most of this decline is due to the repayment of a portion of the MRO/LTRO loans that the ECB ex…
The euro area banking system excess reserves are continuing to decline – touching the lowest level since 2011.
Just to put this in perspective, the chart below shows excess reserves in the US. With the Fed continuing to pump liquidity into the system, these swelled above $2.3 trillion last week – a new record.
The reason the Eurozone reserves are declining has to do with the area’s banks gradually repaying what they have borrowed from the Eurosystem via MRO and LTRO loans.
Some economists view this decline in excess reserves as an indication of tighter monetary conditions in the Eurozone. They point to weak consumer credit growth and a severe contraction in corporate lending.
|YoY change in loans to euro area households (source: ECB)|
|YoY change in loans to euro area companies (source: ECB)|
A few economists have called for Mario Draghi to offer up another round of LTRO lending or lower the rates on MRO (short-term) loans in order to boost excess reserves. The thought is for the ECB to follow the Fed’s and the BOJ’s lead at the October meeting and expand its balance sheet.
Such action however is unlikely at the next meeting. Certainly if these declining excess reserves push up rates, the ECB will have to act. But the central bank does not have the Fed’s dual mandate and is not as focused on the Eurozone’s dangerously high unemployment levels. Instead Draghi will concentrate on forward guidance of maintaining low overnight rates for the foreseeable future. The ECB will want to keep the LTRO tool in its back-pocket in case the crisis flares up again. After all, there is a nonzero risk of the German Constitutional Court ruling against the OMT program (ECB’s commitment to directly purchase government bonds of periphery nations). Other issues, such as political uncertainty in Italy (see post), could potentially reignite the crisis as well.
For now Draghi will want to see if the Eurozone’s credit markets can begin to “heal” themselves. The members of the Governing Council are following a number of business surveys which seem to point to stabilization in the area periphery nations.
If however lending volumes do not show a visible improvement in the next few months, another LTRO program could be in the works at a later date.
Bloomberg: – Frederik Ducrozet, an economist at Credit Agricole CIB in Paris says an LTRO is unlikely until December. The central bank could boost its forward guidance by putting a definite end date for loans at a particular cost, by issuing an LTRO with a fixed rate, he said. The previous loans were charged at the average of the ECB benchmark over the maturity.
‘‘A properly-designed LTRO would have the potential to kill several birds with one stone by enhancing forward guidance, keeping excess liquidity higher for longer, and further boosting the use of collateral from small businesses,’’ Ducrozet said.
ECB officials including Executive Board member Benoit Coeure have played down the short-term likelihood of a new round of long-term loans, saying that while it remained an option, it hasn’t been specifically discussed. The ECB’s Governing Council convenes in Paris on Oct. 2 for its monthly rate-setting meeting.
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Financial news junkies love the Eurozone. Just when things seem to quiet down, something always flares up in the region. This time around it is Portugal that has been grabbing the headlines.
The Federal Reserve is fully committed to its asset-propping strategy: It will raise the economy by lifting asset numbers.