Later this week Mario Draghi and his colleagues at the European Central Bank Governing Council meet up for a policy meeting. As ever there is much for them to discuss and maybe he will raise a glass of Chianti to the passing of a significant threshold. From the ECB.
Public sector assets cumulatively purchased and settled as at 01/09/2016 €1,001,947 (26/08/2016: €990,807) mln
To infinity and beyond indeed as it now strides beyond the 1 trillion Euro barrier in terms of government bonds purchased. There were attempts to put this in perspective.
Completely useless stat of the day: if you made a €1tn pile of €500 banknotes it would be 1189x taller than the ECB HQ. ( @jonathanalgar)
You would have to complete it before they phase out the 500 Euro note though as using 200 Euro notes would be 2.5 times as hard!
Actually if we put all the QE programs into the pot including continuing ownership of Greek government bonds we come 1.37 trillion Euros. Let us look at what it has achieved as we are now at what we were told back in January 2015 was going to be the planned completion date..
Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60 billion. They are intended to be carried out until end-September 2016.
Of course the rate of monthly purchases has risen since then ( 80 billion Euros) and the program got extended until March 2017 as the to infinity and beyond theme continues.
Let me use the words of Mario Draghi from the last ECB meeting.
Incoming data point to ongoing growth in the second quarter of 2016, though at a lower rate than in the first quarter. Looking ahead, we continue to expect the economic recovery to proceed at a moderate pace.
If we also factor in the oil price fall that is not a lot of bank for the Euro area taxpayers buck or Euro. As the program started the Euro area was in the process of seeing economic growth of 0.4% in the last quarter of 2014 and 0.6% in the first quarter of 2016. Of course some in the media were arguing yesterday that such policies work instantly! In reality whilst financial markets can move extremely fast real economies cannot. What we observe in terms of economic growth since has been 0.3%, 0.4%,0.3%,0.6% and then 0.3%. The latter number came with both France and Italy flatlining.
But in a word if you factor in the negative interest-rate of 0.4% and the lower oil price you might say “M’eh”. Or as has already been used in reply to me the word “counterfactual” which of course is the last resort of an economic scoundrel.
We got an implied view from the Mario Draghi quote above and he was unlikely to be cheered by the business survey from Markit yesterday.
The eurozone economy continued to expand at a broadly steady pace in August. The rate of increase edged down to a 19-month low, however, mainly due to a weaker rate of expansion in Germany.
Even less so by this bit.
There were, however, signs that the longest period of sustained job creation in the region over the past eight years may be cooling.
Rather than a glass of Chianti he may now want the whole bottle.
While the overall picture is one of steady but sluggish 0.3% growth in the third quarter, the revised figures indicate that the economy is losing rather than gaining momentum.
This is what the ECB is officially aiming at and is the stated reason for the increase in both the term of the QE program and the faster rate of purchases.
until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.
There was little sign of this in the Markit survey and in fact there were signs of the opposite.
Inflationary pressures are also cooling amid intense competition,
As the current official consumer inflation rate (CPI) is estimated to be 0.2% this poses a problem for achieving a 2% annual inflation target. In fact even the services sector which in both the UK and US is above the inflation target is not in the Euro area. Via its 1.1% annual rate and 44.2% weighting it is pulling the number higher but even if it was the whole index we would be below target still. Ignoring energy only takes us to 0.9%.
The ECB does not seem to have had much success in creating asset price inflation which of course is the central bankers dream. Yes prices of government bonds have surged and more recently corporate bonds have followed. But equities have dropped back since the initial knee-jerk response to QE which saw the Eurofirst 300 push strongly above 1600. As of this morning it is 1379 and virtually unchanged on a year ago. We do not have a reliable house price indicator for the area as a whole but only Austria and Estonia seem of the individual countries to have lit the blue touch-paper.
What is inflation?
Regular readers will be aware that I like to look into the details and I have found this report from Eurostat. Some of the data is for countries outside the Euro area but look at this.
The price of a cup of coffee was surveyed in 15 countries (Figure 4). 8 countries had prices below 1.15 €/cup (7 Eastern European countries and Italy). Norway had the highest average price, where a serving of a cup of coffee costs 3.08 €/cup on average. 3 other countries had prices above 2€/cup (The Netherlands, Finland and Germany).
Prices so different poses challenges for inflation measurement. Oh and if you are looking for the most expensive prices in Europe you seem unlikely to go broke by just answering Norway!
Usually this is presented for Greece and the ESM loves to tell us how much it has saved Greece. Seldom can a country which has apparently saved so much been in such shocking shape! But let us move to its opposite in Euro area terms.
Between 2008 and 2015, German government interest payments were a whopping €122 billion less than originally planned for. The figure comes from a ministerial response to a question submitted by the opposition Green Party, which Handelsblatt has seen.
They are over playing their hand as other influences ( safe haven status for example) have been at play here but for the last 18 months or so the ECB has been explicitly driving German bond yields lower leading to this.
In 2015, the German government paid €21.1 billion in interest, almost half the 2008 level, when it paid €40 billion.
For some bonds it is now paid to issue as the ten-year yield is -0.07%.
Germany does not help back
The ECB has moved from asking to pleading for fiscal help but Germany shows very little sign of doing so. It ran a balanced budget in 2014 and 15 and now looks likely to run a surplus. The one time it showed a sign of some expansionism was when Chancellor Merkel promised to take in one million immigrants.
The ECB would love Germany to spend some of the money it is saving and indeed in terms of imbalances ( Germany’s current account surplus) you can make a good case for it. Although it would have to continue to break the Growth and Stability Pact rules on national debt as the Euro area contradicts itself.
Also there is a clear and present danger that the ECB may run out of German bonds to buy as the FT points out.
bankers at Citigroup estimate that the country’s entire government bond market will become ineligible for the ECB’s bond-buying scheme by November.
Bloomberg seems not to have figured this out but there is a clear implication in this point made by Citigroup.
Corporate investment faces a financing hurdle as the weighted-average cost of capital for companies (known as WACC) remains elevated thanks to the stubbornly high cost of equity,
Perhaps the ECB should just buy everything along the lines of “It’s the only way to be sure” from the film Aliens. After all what could go wrong?
As we look back we see a distinctly patchy record. Perhaps the irony is that QE type policies that were for so long criticised for being inflationary have in fact delivered pretty much nothing in that front at least in terms of consumer inflation at least so far. We do see a fair bit of asset price inflation but central bankers call that seed corn for economic growth.
As to economic growth the picture is one of “moderate” growth to use the ECB’s own words. But in the economic world we never get “ceteris paribus” and at the same time there have been other influences which have boosted growth. For example lower oil and commodity prices have boosted real wages and hence consumption and the world economy has grown. Whilst the UK is the current scapegoat of choice via Brexit it is also true that its economic growth since 2013 will have helped the countries that follow its trajectory such as Ireland and Spain.
So a lot of effort for not much and maybe it is an entry in the list of the most expensive PR campaigns in history. Indeed if you allow for the costs of any exit then you may find that the overall impact was in fact negative. On that road to nowhere we will see no exit especially on Mario’s watch.