This year, expectations for an acceleration in average annual terms (from 1.5% in 2015) may be disappointed…….
Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy
Intesa Sanpaolo – Research Department For professional investors and advisers only
The markets’ reaction to negative rates is starting to prove less univocal, raising doubts on the benefits of the current policies.
The euro area is failing to make progress from a growth rate of around 0.3% q/q, in line with the pace recorded over the past two years, i.e. since the end of the recession. In the closing months of 2015 as well, expectations for a possible acceleration were disappointed. Germany and Spain confirmed the cruising speed recoded over the summer months (0.3% and 0.8% q/q respectively), and France and Italy slowed (respectively from 0.3% to 0.2%, and from 0.2% to 0.1% q/q). In essence, the recovery in the euro zone lost steam in the course of theyear after an encouraging start (0.5% in 1Q and 0.4% in 2Q), as the net additional effect of the “external shocks” that had triggered an acceleration between the end of 2014 and the beginning of 2015 (not only the drop in oil prices, but also the effects of the ECB’s QE programme and of the depreciation of the exchange rate) probably partially waned in the course of the year. As elsewhere, growth was mostly driven by services (more linked to the recovery in domestic demand) rather than by industry (more strongly affected by uncertainties on the international scenario). Furthermore, albeit to different degrees from one country to another, the recovery is still being driven by domestic demand, and in particular by consumption; indeed, of all the supportive external factors, the most effective seems the shock to energy prices, which already in 2015 resulted in a significant boost to the purchasing power of households (expected to even strengthen in 2016). This dynamic, against a likely background of slowing exports, should continue in 2016. The haziest aspect of the scenario is the trend of investments: in 2015, businesses enjoyed higher margins (thanks to recovering final demand), but remain very cautious about their investment decisions, given the mounting uncertainties clouding the scenario (not so much domestic as international). What’s worse is that the decline in industrial output in the last two months of 2015 implies an unfavourable roll-over effect for the current quarter, for which we have therefore revised our estimate of GDP growth, to 0.3% q/q, in line with 2H 2015. As a result, economic activity in the euro area in 2016 is unlikely to accelerate from the 1.5% rate recorded last year.
In commenting on the policy rate cut implemented at its meeting of 11 February, the Swedish Riskbank says it must take into consideration the monetary policy accommodation put in place by the other central banks, which risks resulting in a swifter than expected strengthening of the Swedish krona, and therefore to push back in time the return of inflation to the target rate. In Japan, the effect on the currency markets of the BoJ’s rate cut was quickly outbalanced by flight to quality, which has propelled the yen from 118.8 before the meeting to 112.5 today, and contributed to the disastrous trend of the local stock market.
Furthermore, this rush to cut rates, which the ECB is also likely to join in March, is by no means certain to help reassure the markets and support sentiment. The Swedish monetary authorities pointed out the risks implied by the low interest rate regime, and in particular the excessive indebtedness of households, and warned that without containment measures “such a development could ultimately be very costly for the national economy”. However, the responsibility for acting in this realm rests on macro-prudential measures that are yet to bedefined, and on reforms aimed at reducing the imbalance of demand and supply on the real estate market. Furthermore, in the euro area as well the rush to cut rates to increasingly negative levels is also creating concerns tied to the impact on the profitability of banks.
Source: BONDWorld.ch
Newsletter
