Slowing growth and higher inflation is a toxic combination for the Euro area

Sometimes life comes at you fast and the last week will have come at the European Central Bank with an element of ground rush. It was only on the 30th of last month we were looking at this development.

Seasonally adjusted GDP rose by 0.2% in the euro area (EA19) and by 0.3% in the EU28 during the third quarter
of 2018,

Which brought to mind this description from the preceding ECB press conference.

Incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures. The underlying strength of the economy continues to support our confidence ……..

There was an issue with broad-based as the Italian economy registered no growth at all and the idea of “underlying strength” did not really go with quarterly growth of a mere 0.2%. But of course one should not place too much emphasis on one GDP reading.

Business Surveys

However this morning has brought us to this from the Markit Purchasing Managers Indices.

Eurozone growth weakens to lowest in over two years

The immediate thought is, lower than 0.2% quarterly growth? Let us look deeper.

Both the manufacturing and service sectors
recorded slower rates of growth during October.
Following on from September, manufacturing
registered the weaker increase in output, posting its
lowest growth in nearly four years. Despite
remaining at a solid level, the service sector saw its
slowest expansion since the start of 2017.

There is a certain sense of irony in the reported slow down being broad-based. The issue with manufacturing is no doubt driven by the automotive sector which has the trade issues to add to the ongoing diesel scandal. That slow down has spread to the services sector. Geographically we see that Germany is in a soft patch and I will come to Italy in a moment. This also stuck out.

France and Spain, in contrast, have
seen more resilient business conditions, though both
are registering much slower growth than earlier in
the year.

Fair enough for Spain as we looked at only last Wednesday, but France had a bad start of 2018 so that is something of a confused message.


The situation continues to deteriorate here.

Italy’s service sector suffered a drop in
performance during October, with business activity
falling for the first time in over two years. This was
partly due to the weakest expansion in new
business in 44 months.

Although I am not so sure about the perspective?

After a period of solid growth in activity

The reality is that fears of a “triple-dip” for Italy will only be raised by this. Also the issue over the proposed Budget has not gone away as this from @LiveSquawk makes clear.

EU’s Moscovici: Sanctions Can Be Applied If There Is No Compromise On Italy Budget -Policy In Italy That Entails Higher Public Debt Is Not Favourable To Growth.

Commissioner Moscovici is however being trolled by people pointing out that France broke the Euro area fiscal rules when he was finance minister. He ran deficits of 4.8% of GDP, followed by 4.1% and 3,9% which were above the 3% limit and in one instance double what Italy plans. This is of course awkward but not probably for Pierre as his other worldly pronouncements on Greece have indicated a somewhat loose relationship with reality.

Actually the Italian situation has thrown up another challenge to the Euro area orthodoxy.


Regular readers will be aware I am no fan of simply projecting the pre credit crunch period forwards but I do think that the Brad Setser point that Italy is nowhere near regaining where it was is relevant. If you think that such a situation is “above potential” then you have a fair bit of explaining to do. Some of this is unfair on the ECB in that it has to look at the whole Euro area as if it was a sovereign nation it would be a situation crying out for some regional policy transfers. Like say from Germany with its fiscal surplus. Anyway I will leave that there and move on.


This did the rounds on Friday afternoon.

ECB Said To Be Considering Fresh TLTRO – MNI ( @LiveSquawk )

Targeted Long-Term Refinancing Operation in case you were wondering and as to new targets well Reuters gives a nod and a wink.

Euro zone banks took up 739 billion euros at the ECB’s latest round of TLTRO, in March 2017. Of this, so far 14.6 has been repaid, with the rest falling due in 2020 and 2021.

This may prove painful in countries such as Italy, where banks have to repay some 250 billion euros worth of TLTRO money amid rising market rates and an unfavorable political situation.

So the targets of a type of maturity extension would be 2020/1 in terms of time and Italy in terms of geography. More generally we have the issue of oiling the banking wheels. Oh and whilst the Italian amount is rather similar to some measures of how much they have put into Italian bonds there is no direct link in my view.

Housing market

If you give a bank cheap liquidity then this morning’s ECB Publication makes it clear where it tends to go.

The upturn in the euro area housing market is in its fourth year. Measured in terms of annual growth rates, house prices started to pick up at the end of 2013, while the pick-up in residential investment started somewhat later, at the end of 2014. The latest available data (first quarter of 2018) indicate annual growth rates above their long-term averages, for both indicators.

How has this been driven?

 In addition, financing conditions remained favourable, as reflected in composite bank lending rates for house purchase that have declined by more than 130 basis points since 2013 and by easing credit standards. This has given rise to a higher demand for loans for house purchase and a substantial strengthening in new mortgage lending.

Indeed even QE gets a slap on the back.

Private and institutional investors, both domestically and globally based, searching for yield may thus have contributed to additional housing demand.

It is at least something the central planners can influence and watch.

Housing market developments affect investment and consumption decisions and can thus be a major determinant of the broader business cycle. They also have wealth and collateral effects and can thus play a key role in shaping the broader financial cycle. The housing market’s pivotal role in the business and financial cycles makes it a regular subject of monitoring and assessment for monetary policy and financial stability considerations.



The ECB now finds itself between something of a rock and a hard place. If we start with the rock then the question is whether the shift is just a slow down for a bit or something more? The latter would have the ECB shifting very uncomfortably around its board room table as it would be facing it with interest-rates already negative and QE just stopping in flow terms. Let me now bring in the hard place from today’s Markit PMI survey.

Meanwhile, prices data signalled another sharp
increase in company operating expenses. Rising
energy and fuel prices were widely reported to have
underpinned inflation, whilst there was some
evidence of higher labour costs (especially in

Whilst there may be some hopeful news for wages tucked in there the main message is of inflationary pressure. Of course central bankers like to ignore energy costs but the ECB will be hoping for further falls in the oil price, otherwise it might find itself in rather a cleft stick. It is easy to forget that its “pumping it up” stage was oiled by falling energy prices.

Yet an alternative would be fiscal policy which hits the problem of it being a bad idea according to the Euro area’s pronouncements on Italy.



17 thoughts on “Slowing growth and higher inflation is a toxic combination for the Euro area

  1. Are the ECB factoring in Brexit in their projections? Would this lead to even less EU growth, especially if it’s a no deal divorce?

    • Hi Foxy

      No apart from maybe as something in the background.

      ” China’s transition to a lower growth path (less dependent on policy stimulus)
      should weigh on its outlook. Furthermore, while the economies of commodity exporters are recovering, they still face the need for fiscal consolidation. Overall, global growth (excluding the euro area) is projected to be 3.9% in 2018 and to decline to 3.7% in 2020. Compared with the June 2018 projections, global GDP growth has been revised down by 0.1 percentage point for 2018 and by 0.2 percentage point for 2019. These downward revisions reflect the weaker outlook in some emerging market economies, particularly in Turkey. In addition, it is judged that rising tensions over trade and heightened uncertainties about the global outlook will dampen global investment in the coming quarters.”

      Sensible really in my view to wait and see what Brexit deal developments take place. Personally I think it was probably done a month or two ago and this stage is about presentation and getting a parliamentary majority for it.

  2. Hi Shaun

    The comments on the housing market collateral effects are just weasel words to cover a result that leads nowhere; the housing market is just an exchange of titles at values driven higher by easy money. The economic benefits are highly dubious.

    I think your final paragraph hits the nail on the head. Fiscal and monetary policy are complementary at the ZLB but in the EU they are not only separate but are subject to separate rules. Fiscal policy has to take place within the straitjacket of the Growth and Stability Pact which seems not to recognise the fact that there are 19 separate economies in the EZ each with different needs in terms of fiscal profile.

    What is interesting is that the whole structure almost seems set up to fail by creating tensions that cannot be resolved this side of monetary union, which is tantamount to political union. I wonder if this was deliberate as some think? If so then any organisation that tolerates youth unemployment on the scale of the PIIGS should have a question mark against it, notwithstanding that some of these countries did have difficulties before the introduction of the Euro.

    • Excellent comment. I think that:
      1. The EU politicians and Brussels have always thought about “ever closer union” as a sacred objective
      2. National politicians have generally bowed to the closer union concept, but haven’t kept the voters in line on this
      3. The central bankers have been told to do whatever they can in interest rates and QE and have done so
      4. The reasons behind QE are actually quite varied. Some see it as doing whatever it takes to save the euro. Others see it as a way of keeping interest rates down to save asset classes and therefore the banks
      5. The fiscal constraints are an attempt to stop national governments increasing euro debt. It has nothing to do with helping individual European economies.
      Overall, I think that the above show a fundamental mismatch between political and economic objectives and I don’t think that it will end well.

  3. In the old days, what is referred to now as high inflation and low growth was stagflation, but the term has fallen out of favour, no doubt because of its negative associations and the mixing of the two toxic symptoms of policies designed to neutralise excess debt – stagnation and inflation.
    Nowadays we have terms like QE for blatant monetisation of deficits,populist for the will of the people, racist/far right for people who oppose masss uncontrolled immigration and a whole raft of legislation designed to shut down free speech which together with the censorship of social media companies like Facebook,Twitter and You Tube are ostensibly targetting anyone who opposes the globalists and their plans to destroy the white west.

      • which kinda reminds me of the Labour party or was it the GLC that inspired a tory minister to state that they appealed to ” black lesbian single mums against the bomb” ?


      • don’t forget to point out that you’re a male facing transgendered lesbian if anyone asks and that they are infringing your rights to be what ever you want under intersectionality rules

        anyhow enough of the politics and lets get the printing presses primed and BIRP rates ready !!

        and nobody in charge is responsible for anything if it goes wrong ! ( but gets accolades if it goes right – knighthoods ready and loaded !! )

        make mine another double !!



    • I agree with your points up to the ” white west ” bit .

      from my ancestry I cannot claim that

      but as far as Western enlightenment with the scientific method and with regards to actual data and sound conclusions . Based in competence and accuracy , not clouded by corruption or , frankly, lying about the data and results to suit a political agenda ( as I’d posit pointed out here on Shaun’s blog about economics and what being done in our name with the Banks, economy and finance – and what duplicity is in great abounds in our supposed superiors , if not outright blagging it ….)


      I’ll go and get a good single malt ….


  4. Typical EU: Do as I say, not as I do.
    So glad we’re leaving, suspect Italy will have triggered Article 50 in 3-5 years, if, of course, there’s still a European Union.

    • Errr…. sorry to destroy your illusion, we’re not leaving, Treason May will sign a deal that keeps us in the customs union and virtually every other condition of remain stays the same ….and it will be called BREXIT and a triumph.All the BREXITEERS JRM et al, will fold like a cheap suit when push comes to shove, just wait and see. It has all been agreed and stitched up in advance to tgive the illusion of negotiations.

      • She will try to, I have known that all along. She will fail. JRM will not fold because he has no ambitions to cabinet.

  5. Hello Shaun

    I’d go with QE by another name . Money printing being sterilzed and all that, worked so well to save the Banks last time

    pity they’re still broke


    • Hi Forbin

      That is a bit of a blast from the past with your reference to the Securities Markets Programme and the sterilisation effort. As you know I thought it wasn’t really but we can worry about that another day should we see something like that.

      As to QE the issue is Germany if we look ahead. A reshuffle of the capital key is due and that will only make it a bigger factor. Yet as it runs a fiscal surplus there are not so many bunds to buy. So for more QE on a major scale Germany needs to run a fiscal deficit.

  6. The slowing growth in Europe will affect the UK and manufacturers in the UK not investing due to concerns over BREXIT, so slowing growth in the UK will just exacerbate the whole situation.

    The car industry been one of the drivers in Germany’s economy and the slowdown affected both the UK and Germany due to numerous factors.

    Two car-parts factories announce closure today:

    Growth is definitely slowing down worldwide imo and I don’t think anyone has any idea how to turn things around at the moment, other that more QE or interest rate cuts again, but the leaders don’t seem to want to admit that is what they may have to do again.

    Latest polls on BREXIT seem to have turned around now but nothing seems to be changing at the top the PM determined to seek what the electorate wanted and no consideration to what the public want now.

    Its a total mess !

    • Hi Peter

      We can look at it another way. If we stay with the car industry there were so many measures to boost demand such as cash for clunkers, lower interest-rates, QE and credit easing. At some point demand had to slow a bit as it was on steroids. Added to that we have the ongoing diesel scandal and now of course the Trump trade policy. So we are seeing short-time working and shut downs across quite a few different companies and countries.

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