JAKARTA (TheInsiderStories) – Eurozone economic growth, especially in the industrial production sector seems to be getting weaker in recent months, remarked by Luis de Guindos, Vice-President of the ECB, today (02/11). This is evident from the decline in production in the second half (2H) of 2018 and was widespread in various sectors and most major economies.
Guindos said there were weaker business investment fluctuations and on the external side, Euro area trade experienced a marked decline in the amount of net exports. In the last two quarters of 2018, Eurozone’ real GDP increased by 0.2 percent quarter-to-quarter, down from 0.4 percent in the first two quarters (on the basis of preliminary).
According to him, there are a number of dominant factors that have caused the downturn, for example in the automotive sector due to new regulations, street protests and weather conditions.
In addition, there is uncertainty about the magnitude and persistence of these factors, short-term growth in the Euro area tends to be weaker than previously thought.
Meanwhile, the global economic growth shows signs of an increasingly mature economic cycle. Global activity is still developing, but the growth of important Eurozone trading partners, such as China, has been moderate.
This certainly has an effect to reduce the export capacity of the Euro area. Indeed, most of the slowdown in growth in the third quarter of 2018 came from a weaker contribution from net exports.
Moreover, he noted, geopolitical uncertainties, the threat of protectionism, vulnerabilities in emerging markets and volatile financial markets have proven to be more persistent than initially foreseen. In Europe in particular, the state of play of the Brexit negotiations is adding to the uncertainty, said Guindos.
All of these elements have increasingly weighed on economic sentiment and are now reflected in moderating business and consumer confidence.
According to him, the main inflation rate has also declined, where headline inflation fell to 1.4 percent in January, from 1.6 percent in December, mainly due to a decline in energy prices. It is estimated that headline inflation will likely decline further in the coming months based on the financial market outlook for oil prices.
However, he assessed if the resilience factors would remain stable. Euro area expansion is expected to continue, supported in particular by conditions of favorable financing, further increases in employment, wage increases and lower energy prices.
In fact, bank lending rates for Euro-area companies and households remain close to historically low levels. The latest bank loan survey confirms that credit standards remain profitable and loan demand continues to increase.
Therefore, in his point of view, with solid income expectations and company balance sheets, this favorable funding condition must support business investment. The labor market dynamics remained strong, with Euro area unemployment at 7.9 percent in December, the lowest level in more than ten years.
Meanwhile, wage increases must continue to support household income and private consumption. Lower energy prices support real income and must provide an additional boost to domestic demand.
Turning to inflation, a high level of capacity utilization must continue to strengthen labor cost pressures. Growth in compensation per employee increased to 2.5 percent in the 3Q of 2018, has been increasing steadily since 2016.
He considered, although short-term growth tends to be weaker than expected, conditions for sustainable economic growth remain – conditions of supportive financing, favorable labor market dynamics, and increased wage growth.
“Significant monetary policy stimulus remains important to support an increase in further domestic price pressures and major inflation developments in the medium term,” said Guindos in a written statement.
He acknowledged that in the end of our net purchases in December last year does not imply that Euro monetary policy has become less accommodative.
In fact, ample monetary policy accommodation is still provided by our forward guidance on the key ECB interest rates, which is reinforced by our forward guidance on the reinvestments of the sizeable stock of acquired assets.
Written by Daniel Deha, Email: email@example.com