Euro-area investment fell in the second quarter for the first time in more than a year, reflecting the gloomy outlook presented by Mario Draghi yesterday as he unveiled new European Central Bank stimulus.
The economy stagnated in the three months through June as investment fell 0.3 percent, data today showed. Consumer spending and exports rose, while change in inventories subtracted from gross domestic product.
“The breakdown was a little less bad than it might have been,” said Jonathan Loynes, chief European economist at Capital Economics in London. “But it is not clear that this provides a foundation for stronger growth ahead. The recent fall in consumer confidence casts doubt over whether household spending will continue to grow.”
The ECB unexpectedly cut interest rates yesterday and said it’ll buy assets as it battles to revive flagging confidence in the economy. Draghi, who held off starting sovereign bond purchases for now, is struggling to boost below-target inflation against a backdrop of near-record unemployment and conflicts in the Middle East and Ukraine.
Fully-fledged quantitative easing as deployed in the U.S. and Japan wasn’t enacted amid a split on the 24-member Governing Council, with Bundesbank President Jens Weidmann opposing the new stimulus and others seeking more
ECB President Mario Draghi
“Additional measures are likely in late 2014 or early 2015, probably through a larger asset-purchase program,” Citigroup Inc. economists including Guillaume Menuet in London said in a note today. That’s because of the ECB’s “strong desire to prevent a further persistent undershooting and the prospect that such an undershoot is still likely.”
Inflation Outlook
Having led the currency bloc out of its longest-ever recession, Germany’s economy shrank 0.2 percent last quarter in its first contraction since the start of 2013, today’s data confirmed. While a separate report today showed German industrial production climbed more than economists forecast in July, a manufacturing index by Markit Economics fell to an 11-month low in August.
Euro-area inflation slowed to 0.3 percent last month, a fraction of the ECB’s 2 percent goal, and Draghi said yesterday that price expectations have worsened. The central bank lowered its benchmark and deposit rates by 10 basis points to 0.05 percent and minus 0.2 percent, respectively.
The rate cuts mark the bottom line for conventional monetary policy. Declaring that the ECB can now reduce them no more, Draghi committed to buying so-called asset-backed securities and covered bonds in the hope that will funnel cash into the economy.
Growth Forecasts
The ECB also lowered its 2014 and 2015 GDP forecasts yesterday and now sees growth of 0.9 percent and 1.6 percent. Inflation is seen averaging 0.6 percent this year instead of 0.7 percent previously. The inflation outlook for 2015 was unchanged at 1.1 percent.
From a year earlier, the euro-area economy grew 0.7 percent in the second quarter, down from a 1 percent rate in the previous three months, according to today’s report.
Companies have reflected the bleaker outlook. Germany’s VCI chemical trade group, which represents firms including BASF SE and Lanxess AG, said sales and production this year will be lower than previously anticipated as industrial customers curb production. Vinci SA (DG), Europe’s biggest builder, cut its 2014 sales forecast amid falling demand in France and in U.K. construction.
“Survey data available up to August indicate a loss in cyclical growth momentum, while remaining consistent with a modest expansion,” Draghi said yesterday.
France stagnated last quarter and Italy succumbed to its third recession since 2008. At the same time, the Spanish (SPNAGDPQ) economy expanded at the fastest pace since 2007, and the Netherlands and Portugal returned to growth.
“There’s no doubt, the risks to the downside have increased,” said Alexander Koch, an economist at Raiffeisen Schweiz in Zurich. “France and Italy will remain the big headaches in the third quarter.”
