Today is one where central banks will take centre stage. In the UK we have not only the monthly meeting of the Monetary Policy Committee of the Bank of England but also the incoming Governor Mark Carney will be questioned by the Treasury Select Committee. If I were in his shoes I would consider it wise to talk plenty but say very little! However a bit later in the day we will get the results of the deliberations of the European Central Bank (ECB). Here something has changed and if we look back to this time last year it becomes clear what.
I would like to take you back to the press conference of the ECB meeting then where we told this.
Real GDP growth in the fourth quarter of 2011 is likely to have been very weak. According to the survey data for the last two months, there are tentative signs of a stabilisation in economic activity at a low level.
Okay so a bit of a struggle but the Euro area had some growth and was expected to stabilise. The ECB responded to this as shown below.
Since the first three-year longer-term refinancing operation (LTRO) was conducted in December 2011 we have approved specific national eligibility criteria and risk control measures for the temporary acceptance in a number of countries of additional credit claims as collateral in Eurosystem credit operations, which should lead to an increase in available collateral
So we had in response two Long Term Repurchase Operations which totalled just over one trillion Euros and the eligibility criteria were very “liberal”. Also we got this in spite of the inflation position.
Euro area annual HICP inflation was 2.7% in January 2012, according to Eurostat’s flash estimate, unchanged from December
We had also recently seen cuts in the interest rate of the ECB at both its November and December meetings. So we can conclude that it was putting its foot to the floor in monetary policy terms.
The real economy
You might think that it was in quite a state. However we already know that inflation was above target which poses a question about policy easing so let us look deeper. We now know that the Euro area as a whole grew by 1.4% in 2011 according to Eurostat but had dipped by 0.3% in the final quarter. The Euro area unemployment rate was 10.8%.
Now let us step forwards to February 2013
We now know that 2012 was a difficult year for the Euro area with overall growth being expected by Eurostat to be -0.4% which is 1.8% worse than the 2011 performance. We also know that the unemployment rate deteriorated by 0.9% over the year as it is now 11.7%. the latest retail sales numbers for the Euro area told us this.
In December 2012, compared with December 2011, the retail sales index dropped by 3.4% in the euro area
We also had a the latest business survey which unless you work for the business section of BBC News 24 showed another contraction. Apparently a reading of 48.6 below the 50 benchmark is “really strong” to them! Anyway we saw this.
A diverse picture was seen among the four largest euro members, with strong growth in Germany –output grew at the fastest rate for just over a yearand- a-half – contrasting with ongoing downturns in France, Italy and Spain.
So if we exclude Germany the picture looks rather grim and personally I would like to see some other numbers for her backing this up. We have a Euro area of three speeds with more and more moving into reverse gear.
Has monetary policy tightened?
During 2012 we saw one more rate cut in July reducing the official rate to 0.75% and the deposit rate to zero. However as we stand right now there have been some signs of a tightening of conditions.
The Euro exchange rate was falling in early 2012 giving its economies a competitive boost as it dropped on a trade weighted basis from 107.28 in May 2011 to 94.4 in July 2012. However since then it has been rising and as I type this it is at 102.46 so up 8.5% from the lows and higher than at this time last year. so recently we have seen a tightening of conditions here.
We also now know that quite a few banks have been repaying their LTRO funds after only a year of the three-year term. I think that this in itself is ominous as if you cannot make a profit on funds only costing you 0.75% per annum you must have a very grim outlook! Of the first LTRO some 140.5 billion Euros has already been repaid and of the second from the various announcements it looks as though the repayment amount will be in total over 300 billion Euros. We will not know properly until the end of this month but we do know that monetary policy will be tightening here too.
You can also put the decline in stimulus policies this way.
The annual growth rate of the broad monetary aggregate M3 decreased to 3.3% in December 2012, from 3.8% in November 2012.
Also we see that banks are not helping busnesses expand and in fact are a contractionary influence at present.
The annual growth rate of loans to non-financial corporations was more negative at -2.3% in December, from -1.9% in the previous month
I have looked at this topic in this way because if you were a Martian observing events from afar you would be expecting an easing of policy from the ECB today. In real economic terms the situation is worse than it was a year ago when the ECB responded with two interest-rate cuts and a just over a trillion Euro liquidity supply. But of course if we continue with the theme that central banks protect other banks rather than real economies we can recall this from last February’s ECB press conference.
The soundness of bank balance sheets will be a key factor in facilitating an appropriate provision of credit to the economy over time
It always seems to be the banks does it not? And as I pointed out in my latest update on Spain the rise in mortgage rates seems to indicate that rather than passing the help they have received on they have done the reverse. Indeed the bank lending figures above sing from the same hymn sheet.
Also the soundness of bank balance sheets has seen some questions that need to be answered. In Italy the world’s oldest bank Monte del Paschi has been caught red handed using derivatives to misrepresent it figures and required a bailout. Fans of the ECB taking over Euro area bank supervision may like to look away now as the supervisor of this bank was none over than Mario Draghi! Also in the Netherlands the fourth largest bank SNS Reaal has been nationalised at an expected cost of 3.7 billion Euros,although I note that an extra 5 billion Euros have been provided too. Oh and a promise of a profit on the investment for the Dutch taxpayer which is a very oddly declining verb as it moves into the future!
But if we return to 2012 we saw that when the banking system was under pressure the ECB came over the hill like the US Cavalry. So we will see a test later as to what it does when the real economy is under a lot of pressure.