Weekly Business Insights from Top Ten Business Magazines | Week 327
Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Since September 2017 | Week 327 | December 15-21, 2023
Shaping Section 1
Europe’s economy is in a bad way. Policymakers need to react
The Economist | December 12, 2023
Extractive Summary of the Article | Listen
European stocks and bonds have had a lot to deal with in recent years, not least war, an energy crisis and surging inflation. Now things are looking up. Germany’s dax index of shares has added 14% since the start of November. Yields on French ten-year government bonds have dropped from 3.5% in October to 2.6%. Even Italian yields have fallen below 4%, from 5% in mid-October. Investors are upbeat in part because inflation is falling faster than expected. Yet their mood also reflects a grimmer reality: the economy is so weak that surely interest-rate cuts are not far away.
Will policymakers follow through? In November inflation stood at 2.4%, within a whisker of the European Central Bank’s target of 2%. On December 13th America’s Federal Reserve sent out doveish signals. Markets are now pricing in at least three ecb cuts by June, with about six in total by October, to bring down the main rate to about 2.5%. Since Europe’s economy is weakening fast, officials risk being slow to react.
There are two reasons for concern. The first is wage growth. Initially, inflation was driven by rising energy prices and snarled supply chains, which pushed up the price of goods. Since pay deals are often agreed for a number of years in Europe’s unionised labour market, wages and prices of services took longer to respond. The second reason for concern is the health of the overall economy. It has struggled with weak international demand, including from China, and high energy prices. Now surveys suggest that both manufacturing and services are contracting gently. A consumption boom in parts of Europe is already fading: monetary policy itself is weighing on bigger debt-financed purchases and mortgage-holders are scaling back to meet larger monthly payments.
Declining market interest rates ought to help ease financial conditions for both consumers and investors, and therefore reduce the need for the ecb’s policymakers to move quickly. However, there is a catch. These lower market interest rates mostly reflect falling inflation, and so do not produce lower real rates. As a result, they are unlikely to do all that much to stimulate demand.
There is one more reason for central bankers to get a move on. Interest-rate changes affect the economy with a substantial delay. It takes time for higher rates to alter investment and spending decisions, and subsequently to produce lower demand. The full brunt of changes in rates usually takes a year or more to be felt, which means that many of the ecb’s rate rises are still to feed through. Policymakers have probably tightened too much.
2 key takeaways from the article
- European stocks and bonds have had a lot to deal with in recent years, not least war, an energy crisis and surging inflation. Now things are looking up.
- There are two reasons for concern. The first is wage growth. Initially, inflation was driven by rising energy prices and snarled supply chains, which pushed up the price of goods. Since pay deals are often agreed for a number of years in Europe’s unionised labour market, wages and prices of services took longer to respond. The second reason for concern is the health of the overall economy. It has struggled with weak international demand, including from China, and high energy prices. Now surveys suggest that both manufacturing and services are contracting gently. A consumption boom in parts of Europe is already fading: monetary policy itself is weighing on bigger debt-financed purchases and mortgage-holders are scaling back to meet larger monthly payments.
(Copyright lies with the publisher)
Topics: European Union, Economy, Inflation, Employment, Interest Rate