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COLUMN-Europe, U.S. show similar profiles: James Saft
May 15, 2014 / 8:21 PM / in 4 years

COLUMN-Europe, U.S. show similar profiles: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

May 15 (Reuters) - Very poor European growth figures add a hint of concern about a cyclical downturn to enliven the ongoing worries about a structural malaise.

What is particularly striking is the way in which the euro zone and the U.S., though operating in vastly different conditions, are both exhibiting some common traits: very poor economic growth, very low inflation and a bond market which is predicting more of the same.

The news from Europe on Thursday was disappointing, with euro area GDP advancing only 0.2 percent in the first quarter. Most of that paltry growth seems to have come from a buildup in inventories rather than an expansion in actual final demand.

And while Germany did surprisingly well, growing by 0.8 percent in the quarter, the data elsewhere was far less good. Growth in France was at a standstill, while in Italy it contracted by 0.1 percent and the Netherlands’ shrank by 1.4 percent. Inflation in April was at 0.7 percent with large swaths of the euro zone in or near outright deflation.

No surprise then that what has been a source of calm - the fact that borrowing markets are ticking over nicely for euro area sovereigns - is now looking like a warning sign. German 10-year yields were as low as 1.37 percent on Thursday, while even Italy can now borrow for 10 years at just over 3 percent. Euro zone bonds are telling you that yes, as the European Central Bank essentially promises, you will get your money back, but don’t hope for too much economic growth or inflation to go along with it.

All of this puts pressure squarely on the ECB, which at last seems ready to move, almost certainly at its June meeting. Look for a cut in all official rates, something which would take the deposit rate into negative territory. Here’s hoping too the ECB gets over its institutional and procedural hurdles and manages to actually create something to channel credit to smaller businesses.

That could, according to reports, take the form of a tit-for-tat injection of liquidity, with the payback from banks taking part being an increase in lending to smaller firms, or a more straightforward QE-style program of buying up securitized small and medium-sized entity loans.

All of this isn’t so much too little too late, as same stuff, different year. Or, if you prefer, same stuff, different continent.


Compare, for example, the U.S. to the euro zone. Couldn’t be more different, I hear you say. After all the U.S. enjoys cheap energy, no real fear of Russia there. And the dollar is cheap enough to not only make euro zone exporters jealous but to force the ECB’s hand. Also, the U.S. enjoys cheap market interest rates in a financial market-driven system.

U.S. firms use public markets far more for financing than their euro zone counterparts, who still rely on banks. As said banks in the euro zone are in difficulties this causes, well, issues. Not to mention the U.S.’s other signal advantage - it is a country, not a currency union.

So with all of these advantages, you’d expect the U.S. to be hitting it out of the park, comparatively speaking.

Well U.S. first-quarter growth was just 0.1 percent, with all of the increase attributable to an increase in healthcare spending. Take out healthcare and we’d be looking at a contraction of 1 percent in the first three months.

As for inflation, though there has been a bit of movement in producer prices, benchmark consumer price inflation is still below target, with core CPI 1.8 percent in the year to April.

U.S. 10-year yields touched 2.44 percent and have fallen by half a percentage point so far this year. That’s striking given the higher-than-expected inflation reading released on Thursday.

Clearly in both the U.S. and euro zone there is some reason to hope the rest of the year will be stronger than the first six months. And yes, you can say that GDP reports are backward looking and so might be somewhat discounted as old news.

The bond market, however, is forward looking. And what the bond market is telling you on both sides of the Atlantic is that there is very little expectation for growth or inflation.

That’s particularly remarkable given the role central banks are playing. On the one hand Treasuries are rallying despite the Fed buying up fewer of them. Euro zone inflation and growth expectations seem to take very little comfort from the idea of a more active ECB.

Watch bonds, they just might be telling you something. They usually do. (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at (Editing by James Dalgleish)

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