Why the European Central Bank is expected to cut rates, again
Why the European Central Bank is expected to cut rates, again
What a difference a continent makes. I’m thinking of us over here, the U.S. economy, versus the one they’ve got in the European Union, one of our biggest trading partners.
The European Central Bank, which sets interest rates within the EU, meets Thursday and is widely expected to cut them for a third time, having already cut by 25 basis points in June and again in September.
Now remember, the Federal Reserve waited until mid-September to start cutting rates. It cut by an outsized 50 basis points. But since then, amid reports of stronger-than-expected inflation and job growth and resilient consumer spending, there’s been growing doubt among investors and economists that the Fed will continue cutting aggressively for the rest of the year.
Not so in Europe, where inflation has cooled sharply, and the economy’s weak and could use a boost.
Europe’s economy isn’t exactly sick, more like sluggish and kind of under the weather. Eurozone growth was just 0.3% in the second quarter, and Germany stalled out.
“The data is quite concerning, obviously, especially coming from Germany with industrial production,” said Jennifer Lee, an economist at BMO Capital Markets.
Lee said the deterioration in business conditions sets the stage for lower interest rates from the European Central Bank.
It helps that inflation in Europe just fell to 1.8%, significantly lower than in the United States.
In fact, the whole economic story has been different in Europe since the pandemic hit.
Europe’s economy was weaker than ours to begin with, said Jacob Kirkegaard at the Peterson Institute for International Economics, and consumer and business spending wasn’t boosted as much by fiscal stimulus.
“But then Europe had something that the U.S. never had: the external energy price shock that after the invasion of Ukraine, as the Russians messed with the European gas supply,” Kirkegaard said.
Energy and food prices spiked. Europeans started conserving and ramped up natural gas supplies from the Middle East and U.S., and overall inflation fell.
But it’s all left economic malaise in its wake, said Sharyn O’Halloran, a political economist at Trinity College Dublin.
“Prices of oil and energy and housing, the conflict both in the Middle East and with Ukraine have set a different tone for consumers than in the U.S.,” O’Halloran said.
Plus, Germany, the continent’s powerhouse, has problems of its own, especially in the auto sector, said Lee of BMO.
“They’ve basically failed to modernize. They’re very reliant on China for all those key supplies to produce more electric vehicles,” Lee said.
Meanwhile, European farmers have recently become more dependent on cheap fertilizer — from Russia, pointing out just how economically vulnerable Europe is to the conflicts raging around it.
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