Can the eurozone shake off the global gloom? by Simon Tilford
The outlook for the global economy is worsening quickly, raising question marks over the eurozone’s recovery. Will consumption and investment rise by enough to offset the likely weakening of eurozone exports, or will the recovery peter out? What does the deteriorating global environment mean for the ECB’s attempts to raise inflation and to ward off threats to the debt sustainability across the eurozone? The currency union is at no risk of falling back into recession in 2016, but last year might turn out to have been as good as it’s going to get. The eurozone economy expanded by around 1.5 per cent in 2015, and hence by considerably less than the US or the UK. The weakness of eurozone activity was one reason why inflation across the currency bloc fell to zero. While economic recovery accelerated in some member-states, notably in Spain and Ireland, the French and Italian economies remained weak, and German growth disappointed yet again, coming in at 1.5 per cent. Had the eurozone rebounded from the downturn and then growth had slowed to 1.5 per cent, that level of growth would have been less disappointing. But the currency union has barely recovered pre-crisis levels of activity. Indeed it is a testament to diminishing expectations that the eurozone’s 2015 growth performance is seen as something of a success. With interest rates at just 0.5 per cent, the fiscal position across the currency union as a whole neutral and big falls in the prices of oil and commodities
boosting households’ purchasing power, it is disappointing that growth was not stronger. Will the recovery gain momentum or stall in 2016? On the plus side, the ECB will leave interest rates at close to zero and charge banks more to deposit funds with it, in an attempt to get them to increase their lending. In all likelihood, the ECB will also persist with quantitative easing – the practice of central banks electronically creating new money and buying financial assets, such as government bonds – in an attempt to boost economic activity and inflation. Fiscal policy across the eurozone as a whole is likely to be mildly expansionary, not least because of refugee related expenditure in Germany. Credit conditions for businesses have improved across the eurozone as a whole. And the further steep fall in oil and other commodity prices should provide an additional fillip to consumption, at least in the short term.