FRANKFURT (MNI) – As the euphoria surrounding the robust German and
Eurozone growth in the second quarter wears off, policy-makers have made
it clear that some turbulence is to be expected in the recovery ahead.
These prospects lend weight to officials’ comments that December is
the earliest date at which the European Central Bank will decide on how
to phase out its remaining non-standard liquidity measures. And, if the
economy takes a turn for the worse, the bank might further postpone
action, unless the price stability outlook worsens.
While Eurozone GDP data in 2Q were “particularly positive,” there
remains “very high uncertainty,” Governing Council member Yves Mersch
cautioned Thursday.
“According to our baseline scenario, to which we remain very
attached,” he said, “the gradual recovery will continue.” It will be
uneven “across time, countries and sectors,” he warned.
Risks to the economic outlook are to the downside, whereas
inflationary risks are balanced to the upside, the head of Luxembourg’s
central bank said.
Echoing comments from his colleague Ewald Nowotny last week, Mersch
said the next meeting where a decision on the withdrawal of non-standard
measures would be taken is December.
Council member Erkki Liikanen also said Thursday that the global
economic recovery will continue but at a slower pace going forward and
indicated that the same outlook applied for the Eurozone.
Some early data for Q3 have already been disappointing, notably
German factory orders and industrial production in July, lending
credence to bearish forecasts for the future.
On the other hand, French industrial production surprised on the
upside in July, and there, the factory PMI polls suggest that fears of a
slowdown might be exaggerated.
While the ECB remains committed to unwinding liquidity supports, it
will not be rushed in the process, President Jean-Claude Trichet told
the Financial Times:
“As markets gradually stabilise, our non-standard measures, which
are fully consistent with our mandate and, by construction, temporary in
nature, will continue to be progressively phased out,” he said. “So we
are accompanying the market as it progressively goes back to normal.
But, as I said already, it is a process which takes time.”
Prospects of slower growth going forward combined with renewed
tensions on the periphery certainly justify the ECB’s caution.
Investors are worried about Ireland’s ability to deal with its
embattled lender Anglo Irish Bank and the consequences that the bank
might have on Ireland’s fiscal position. Concerns about Portugal’s
unemployment and its difficulties in slashing its deficit are also
spooking investors.
Greece, despite the generous rescue package it received earlier in
the year, is still unsettling the markets. Government revenues are below
target and the public deficit remains higher than expected.
Some have called into question the reliability of European Union’s
stress tests as a gauge for judging the health of European banks.
Trichet, in his inimitable way, told the FT: “we are in a situation
where central banks in particular, and also other authorities, have to
remain alert and have to know that we are in an uncertain universe.”
Certainly true. Another confidence shock — an unlikely but not
impossible event — especially one in which the peripheral countries
come under attack as in May, could oblige the ECB to slow or reverse its
exit strategy.
The ECB is ready for such a challenge, Trichet said: “We always
have to be prepared for new challenges that can not necessarily be
foreseen and that might be in some respect unpredictable. We have
permanently to be in a state which I call credible alertness.”
However, if the economy advances as expected, with indicators
signalling slower growth but no setbacks, and if negative assessments of
US growth prospects prove exaggerated, as Trichet suggested in his FT
interview, then policy should also proceed as expected.
In other words, the universe will remain calm.
–Frankfurt newsroom +49 69 72 01 42; Email: tbuell@marketnews.com
[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$]