The Dire Eurozone Growth Story
After Thursday’s European Central Bank (ECB) announcement that they were cutting rates by 25 basis points to 1.00% and pumping ever more money into the markets, Business Monitor International’s Global Economic Strategist, David Snowdon, appeared on CNBC to talk about the move.
At the core of the ECB’s decision was the realisation of quite how terrible the economic situation is in the eurozone. BMI is forecasting a contraction of 4.2% this year in the eurozone economy, which is worse than the 3.3% expected in the US. Despite all the attention being focused on the US financial sector, it is worth restating the obvious at this point. The current global recession is going to hit the export-dependent eurozone worse than the consumer-orientated US. It will take a recovery in the US and Asia for the eurozone economy to get up off its knees.
The fact that the driver of the recession is different in the eurozone than it is in the US (exports versus consumption) explains why the ECB has been much less radical in pumping liquidity into the banking sector to date. While the ECB will likely seek to avoid large scale asset purchases going forward, there is a risk that the banking sector could yet feel some more pain. The trigger for this would be a systemic banking crisis in eastern Europe being transmitted to the eurozone, and causing major write-downs by financial institutions in the bloc. This would likely prompt more bailouts from national governments and ever more ECB activism. This remains a risk rather than our core scenario, however.
Addressing the outlook for Central and Eastern Europe specifically, Justin Patrie, head of BMI’s Emerging Europe team, appeared on CNBC last week, as seen in the clip below.