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Overnight the Governing Council of the ECB met for their monthly meeting where they again left rates on hold due to what they saw as temporary inflation pressures. The statement after the meeting was full of the usual “price stability” rhetoric but it was significantly different from previous statements because for once this line was missing:
Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level
the replacement statement was:
Following a contraction of 0.2%, quarter on quarter, in the second quarter of 2012, euro area real GDP declined by 0.1% in the third quarter. Available statistics and survey indicators continue to signal further weakness in activity in the last quarter of the year, although more recently some indicators have stabilised at low levels and financial market confidence has improved further. Over the shorter term, weak activity is expected to extend into next year, reflecting the adverse impact on domestic expenditure of weak consumer and investor sentiment and subdued foreign demand. A gradual recovery should start later in 2013 as our accommodative monetary policy stance and significant improvement in financial market confidence work their way through to private domestic expenditure, and a strengthening of foreign demand should support export growth.
This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downward
What makes the estimates quite remarkable is that you only have to go back to statements made in Q1 2012 to find that the ECB was predicting that the euro area economy would be recovering by now. Mario Draghi has recently stated that he now believes growth will come in late 2013, but I see no reason to see why that estimate should be better than the last. The ECB simply got it wrong, they should acknowledge that fact and endeavour to address the problems with their economic modelling.
The issue is that the ECB, along with the EC and the IMF, have completely underestimated the downside economic feedback from fiscal tightening across Europe and their insistence that weak European economies implement large upfront programs of austerity has led to economic retrenchment of a magnitude far beyond their own predictions.
I warned back in April and May that I thought the ECB was misguided on this point and that the likely outcome of this policy was continuing economic weakness which would be counterproductive in terms of economic stability. It would appear more recently that the IMF has begun to adjust its position; not for the first time , and I note a recent research paper from them showing that fiscal multipliers are dynamic and are of greater magnitude during periods of economic stress. I would recommend Mario Draghi get a copy for his staff.
What I also note from last night’s statement is something I mentioned in November, in that it appears that Mario has run out of options and has reached the limits of his mandate in the current political climate. Next year’s election cycle is likely to mean that this remains the case and you can see from the answers given by Mr Draghi in the presser that he is deflecting to Europe’s politicians and claiming that the official sector has done enough
In short, the highly conditional OMT is in play and that’s all you’re getting, everything that is going wrong is the politicians fault.