Is it time for ECB to moderate its stimulus? The data say 'yes'
Is it time for ECB to moderate its stimulus? The data say 'yes' ·CNBC
Dr. Michael Ivanovitch
The latest data on euro area's economic growth, employment creation, price stability and credit aggregates suggest that the European Central Bank's (ECB) extraordinary monetary expansion has been effective, and that a revision of its current policy stance would seem appropriate.
In the year to the first quarter, the monetary union's economy continued to advance along a steady 1.6 percent growth path, with a significant acceleration since last January. Industrial output and household spending also showed that the activity's forward momentum was widely shared within this group of 19 countries with very different economic structures and fundamentals.
That is a laudable achievement in view of resource constraints facing the euro area. Here is what that means: Given that the sum of productivity and labor force growth indicates a noninflationary growth potential of less than 1 percent (i.e., somewhere between 0.8 and 0.9 percent), a sustained actual growth rate of 1.6 percent is a cause for cheer, unless you want to worry – as Germans do - about the (long-term?) inflation implications.
The labor market data explain these lingering German anxieties. The jobless rate in the euro area fell to 10.2 percent in March from 11.2 percent a year earlier, as advancing economic growth cut the unemployment by 1.5 million to a total of 16.4 million.
MIA: European solidarity
Germany's fully employed economy showed only 4.2 percent people out of work – the lowest in the euro area – compared with 24.4 percent in Greece and 20.4 percent in Spain. Sadly, the differences in youth unemployment (persons under 25) are even starker: 6.9 percent in Germany (again the lowest in the euro area) and 51.9 percent in Greece, 45.5 percent in Spain and 36.7 percent in Italy.
No wonder that growing labor market tensions led the German Chancellor Angela Merkel to invite – without any consultation with other euro area countries – all comers from the Middle East and Central Asia. With Germany's unit labor costs growing at an average annual rate of 2.5 percent over the last four years (more than double the euro area's average of 1.1 percent, and an entire percentage point above America's 1.7 percent), Berlin was rightly concerned about its competitive standing on world export markets.
The only question is this: Why did not Germany invite some of its fellow Europeans from desperately poor Melilla, Andalucía, Extremadura (Spain) and Dytiki Ellada (Greece), where unemployment rates currently range from 28.5 percent to 34 percent, and where the destitute youth jobless rates go from 55.4 percent to a heart-rending 79.2 percent.
Some Europeans are beginning to ask these questions, but more about that later.
And here is an interim conclusion: With some help from less restrictive fiscal policies, the ECB has driven the euro area economic recovery and job creation to the point where its virtual "helicopter money" may no longer be needed; a much more moderate policy accommodation may suffice.
But what about the price deflation?
As in most other places, the euro area deflation is the energy bonanza compliments of the Saudis. With estimated onshore marginal production costs of $3/barrel, they are running out of business high-cost producers under the guise of spoiling their arch-rival Iran's return to large oil revenues.
An 8.6 percent decline of euro area's energy prices in April (following an 8.7 percent decline in March) is the main reason why the general level of price inflation was dragged down to -0.2 percent. But price increases for services (1 percent), food, alcohol and tobacco (0.8 percent) and non-energy industrial goods (0.5 percent) brought inflation – excluding energy – to 0.8 percent, roughly the average non-energy inflation rate in the first four months of this year.
Divisive Germanophobia
Counting on a continuing Saudi help in suppressing energy costs and headline inflation is obviously an implausible assumption. You can be sure that the ECB shares that view. And you can also safely assume that the ECB is aware of the fact that the tightening labor markets are driving up euro area employee compensations (about 2 percent), which are only partly offset by labor efficiency gains (0.6 percent).
There is no reason for imminent alarm, though. But this may be a timely signal to ease up on the gas pedal. And if the core inflation target is somewhere between zero and 2 percent, the euro area is already firmly anchored in the middle of that range.
Is there anything that could delay the moderation of the ECB's current policy stance?
Yes, plenty. Germany has gone suspiciously quiet after the ECB warned on April 21, 2016, that vicious attacks on its policies could unsettle the markets and lead to an even more aggressive monetary easing.
Bravo, Maestro Draghi!
A temporary ceasefire with the ECB may be a good sign, but problems caused by Germany's solo run on EU immigration policies, and its bossing around of the rest of Europe, are tearing the continent apart. The border-free movement within the 26 countries of the Schengen area is gone, including, most notably, between Austria and Germany. Fearing an influx of African and Middle-Eastern migrants via Italy – now that the Balkan route has been closed - Austria is getting ready for a state of emergency and is preparing to erect barriers to Italy on the Brenner Pass.
Undaunted, Chancellor Merkel is vowing to save the united Europe and the Schengen area. But, just like Donald Trump, she is short on details, and she also sounds like Hillary Clinton's discussion of America's improvised "jazz-like diplomacy." Indeed, how will she achieve these lofty goals when the German social consensus has broken down, her own approval ratings are in a free-fall and she is dealing with an increasingly hostile France?
Last Saturday, 400 people were arrested in Stuttgart during the congress of the far-right AfD (Alternative for Germany) opposition party. AfD is currently polling at about 15 percent – a meteoric rise from less than 5 percent last summer. That is adding to problems created by deep disagreements within the governing coalition's sister parties (CDU and Bavarian CSU) and Social Democrats (SPD).
Chancellor Merkel is not sitting pretty, either. As of last week, her policies were approved by only 45 percent of Germans voters, an 11 percentage point decline in the course of April. An earlier poll also showed that nearly half of German people were opposed to her re-election run in 2017.
France, Germany's crucially important euro area ally, is no longer playing along. Paris and Berlin are seriously at odds about immigration, fiscal issues, economic governance, free-trade negotiations with the U.S. and Germany's wantonly throwing its political weight around. The French hostility is reflected in official statements and in right-of-center media representing the views of political forces likely to win the elections in May 2017.
But all that is a Kinderspiel (child's play) compared with incendiary Germanophobia spewed by France's extreme right and extreme left political constituencies – approximately 40 percent of the French electorate.
Investment thoughts
Steady growth, rising employment creation, core inflation in the middle of the target range and the increasing bank lending for household spending and business investments suggest that the ECB can begin to moderate its credit expansion.
It is possible, however, that this process could be slowed down by the growing antagonism between Germany and other key euro area members. The likely failure of the "agreement" with Turkey to hold the migrant waves, and the intensifying influx of African and Middle-Eastern refugees, via Italy, could also be politically and economically unmanageable blows.
The ECB is certainly aware that these developments could negatively affect business and consumer confidence. If that were to happen, it would be entirely plausible for the ECB to delay any significant moderation of its current policy stance.
Weighing all that, my guess is still that unfolding growth and inflation trends (results of ECB's strong stimulus over the last two years) will lead the bank toward a gradual withdrawal of its excessive monetary stimulation in the months ahead.
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