LONDON Jan 6 The economies of the United
States, China and much of the developing world have decoupled
from Europe, leaving it to wallow in various stages of recession
and fiscal disarray.
That is one reason why the key economic event of the coming
week will be a European Central Bank meeting almost totally
focused on how far policymakers will go to boost growth.
Although there are some signs that a bottom may have been
reached in the euro zone's recent economic decline, the pattern
of moderate U.S. and Asian growth book-ending feeble Europe is
firmly in place for the moment.
Manufacturing surveys published just a few days into 2013
laid out the divide starkly.
The United States and China both came in above the 50 index
level that designates growth while the euro zone languished in
recessionary territory for the 17th month in a row.
The December U.S. jobs report last Friday also did nothing
to dispel the idea of recovery, although the prospect of more
wrangling over the U.S. budget still casts a shadow. The dollar
has even begun to rise on the distant prospect of an exit from
years of stimulus.
"From a growth outlook, it is quite hard for Europe to
disappoint," said Michael Metcalfe, responsible for global macro
strategy at State Street Global Markets.
He argues that one of the main risks to the current global
economic consensus is that there is too much gloom attached to
Most discussion about what the ECB will do at its meeting on
Thursday centres on whether it will cut interest rates,
something the bank's policymakers discussed last month before
opting to hold the refi benchmark at a record low 0.75 percent.
It is an open question among economists about how much use a
cut in the refi rate would be. Cutting the deposit rate from
zero, meanwhile, would effectively mean charging banks for
parking their money.
Part of this refi rate cut talk is because inflation
expectations are seen fairly well anchored and because the ECB's
own forecasts suggest the euro zone economy will shrink 0.3
percent this year.
"The economic data would support a rate cut," said Sarah
Hewin, head of Europe research at Standard Chartered Bank.
The consensus of a Reuters poll in December, however, was
for no cut in the first quarter. ECB Executive Board members
Yves Mersch and Peter Praet have both dampened expectations of a
cut in the main refi rate.
Joerg Asmussen, another ECB board member, also said late
last month he would be "very reluctant" about the ECB cutting
its deposit rate - now at zero - any further.
Berenberg Bank economist Christian Schulz argues that those
against cutting rates have an upper hand at ECB at the moment
because ECB President Mario Draghi needs support for his new
bond-purchase programme, a backstop to deter investors from
selling off debt in countries such as Spain and Italy.
"The commitment to potentially unlimited bond purchases is
the key policy tool of the ECB," Schulz wrote in a note.
"To ensure its credibility ... Draghi will have to ensure
maximum support for it in the Governing Council, which gives
hawks a disproportionate weight and will probably prevent
another rate cut to support the economy."
Friday brings China's latest inflation data, once a clear
worry for the authorities and financial markets, both of whom
feared the economy was growing too fast.
The fact that it is no longer cause for undue concern
reflects both the impact of slowing global demand and steady
efforts by Beijing to cool things down without a "hard landing"
that would have rippled across the world.
Japanese bank Nomura reckons that year-on-year Chinese
consumer prices rose 2.2 percent in December, slightly higher
than November's 2.0 percent, but way below the peak of 6.5
percent in August 2011.
This would sit well with growth expectations of around 7.7
to 7.8 percent for the year, two full percentage points below
growth around two years ago. A soft landing, if you like.
"You had inflation taking off, overheating in real estate
and the authorities tightening policy," said Standard
"(Now) inflation has essentially bottomed out. (The Chinese)
authorities are not worried about overheating, nor are they
concerned about a hard landing."
There is relatively little due from the United States in
terms of economic releases, but plenty of issues to chew on.
One is just how widespread the belief is at the Federal
Reserve that stimulus should be coming to an end - a surprising
discovery in last week's minutes.
The other is the budget. Potential economic disaster was
averted at the start of the year with an agreement between the
White House and Congress over taxes, avoiding the "fiscal cliff"
that threatened huge automatic budget austerity.
But the agreement left many things to be dealt with later.
"In our view, it leaves the door wide open for another debt
ceiling fiasco in a matter of weeks, and installed a new
"mini-cliff" for government spending in two months," Credit
Suisse said in a research note.