European economies are showing a marked divergence in performance. Germany, as is by now familiar, is powering ahead, France has stalled and the Dutch economy, in the most recent quarter, shrank by an astonishing 1.4 per cent. Portugal, Italy and Finland also contracted.
The euro area as a whole is estimated to have grown by a feeble 0.2 per cent during the first three months of 2014. Lacklustre growth has led the ECB to pre-announce (almost) further interest rate cuts next month. We are told the main refinancing rate will be cut from a mere 0.25 per cent to something like 0.1 per cent. There are also hints of negative rates for the banks who deposit surplus funds at the ECB and the possibility of more liquidity injections, and maybe, an end to the sterilisation of ECB government bond purchases.
New way of doing things
ECB members have been quick this week to point out that they never "pre commit unconditionally". Indeed, they never pre-commit to anything, so this new way of doing things has come as a big surprise, not least to those of us who think that if current conditions warrant an easing of policy some time in the future, why not simply act in the present? These days virtually any question asked of the ECB has the same answer: the German economy requires one thing, the rest of Europe another. The dawn of the single transferable answer should make life much easier for ECB press conferences. Most forecasters expect the euro area to gently accelerate this year and next. Although sluggish, growth has been positive for a year now and momentum is expected to continue, perhaps helped by that ECB easing – particularly if it helps to get the euro down. Indeed, my dwindling band of friends in the forecasting community took issue with my recent column that suggested current conditions are about as good as it is going to get. There appear to be a number of reasons why I should be more cheerful.
First, there is the behaviour of the UK and US economies. The Bank of England this week noted that Britain is returning to normal economic conditions and that interest rates will, therefore, have to rise sooner or later. The lack of urgency in raising rates is understandable but may come back to haunt them: there are hints that normality has extended in a big way to the labour market and wages are, for the first time in ages, on the rise. We can only look on in envy.
The US presents a more nuanced picture. The most recent data are mixed but it is possible the spectacularly cold winter has distorted the numbers with the underlying story being very similar to that of the UK. It is hard to tell, but I side with the optimists on this one. The US looks to be in very good shape.
Another reason for optimism is the behaviour of the ECB. From time to time it has got policy spectacularly wrong. Raising rates in 2011 was a catastrophic error for which nobody has, or will be, held to account. I find it astonishing the number of people who have forgotten that the ECB raised rates twice in the teeth of a potential second Great Depression. Governance is much in the news these days but does not extend far into euro area macroeconomic policy making: somebody needs to do a review of ECB mistakes and the lessons to be learned.
Policy mistake
Could the sort-of pre-commitment to an easing in June also be a classic contrary indicator, another policy mistake? Conventional wisdom would have it that we should expect another disappointing "too little, too late" announcement from Frankfurt. But if the ECB is getting it precisely wrong, again, it could be easing at just the time the euro area economy is about to accelerate.
While I find the hypothesis attractive it is not, yet, persuasive. But it is an idea worth keeping an eye on. More plausible is the notion it is barely credible a large chunk of the world economy, led by the US and UK economies, accelerates without some minor positive knock-on effects for Europe. In any event, what is happening to the English speaking world is unambiguous good news for the Irish economy.
