WSJ -- Europe continues to suck (not the WSJ's exact choice of words) ...................................
March 1, 2005
EUROPEAN BUSINESS NEWS
Slowdown in Germany and Italy May Delay ECB's Rate Increase
By G. THOMAS SIMS
Staff Reporter of THE WALL STREET JOURNAL
FRANKFURT -- The surprise economic slowdown in Germany and Italy last quarter is helping push the European Central Bank to delay an interest-rate increase, underscoring concerns about when the recovery will kick in.
At Thursday's monthly policy meeting, the ECB is likely to make it known that a rate increase at which it had repeatedly hinted for this spring is premature. And it appears ready to trim its already-slim growth forecasts slightly for 2005 for the 12 nations that share the euro.
The bank is still leaning toward eventually raising rates to keep inflation from rising much above 2%. But the inflation risk also has tempered. The rate of inflation slowed to 1.9% in January, down from 2.4% in December, the European Union's statistics agency said yesterday. It was also the sharpest monthly drop in the history of the euro and the first time the rate has fallen below 2% in nearly a year -- and a rare piece of good economic news.
The ECB's hesitation to increase lending costs may relieve analysts who felt the bank was being too quick to try to raise rates, given the economy's tenuous state. But it also suggests the ECB is worried about more bad growth indicators to come.
That in turn dims the hope, raised at the most recent Group of Seven meeting of finance ministers and central bankers, that Europe will soon become an engine of growth in the global economy to take the pressure off the U.S. ING Financial Markets yesterday revised down its forecast for euro-zone growth this year to 1.6% from 1.7% -- less than half the U.S.'s 3.4%, but stronger than Japan's 0.3%.
In recent days, discouraging news for a European rebound continues to stream in. Yesterday, the European Commission reported that its indicator of economic sentiment in the euro zone dropped in February to the lowest level in nearly a year -- 98.8 -- which is below the 15-year average of 100. The commission blamed a sharp drop in industrial confidence, which bodes ill for corporate investment and jobs in a region where unemployment is 8.9%. Stronger confidence had been one of the bright spots of Europe's struggling recovery, but that may be going into reverse as well.
"It is a very weak recovery" said Gernot Nerb of the Ifo economic research institute in Munich. "It would be dangerous to move ahead with rate increases too fast."
The ECB saw affairs a bit differently as recently as December. At their monthly meeting, ECB governing-council members discussed raising rates, though they opted to remain steady by a large majority. Later, ECB President Jean-Claude Trichet called inflation "worrisome," and officials tried to brace markets for the possibility of a rate increase as soon as this month.
But two weeks ago Germany and Italy reported that their economies shrank 0.2% and 0.3%, respectively, in the fourth quarter of 2004. This pulled the growth rate for the euro zone down to 0.2%, compared with 0.3% in the third quarter. It marked the second quarter of disappointing growth in an economy as large as that of the U.S.
ECB officials blame the weakness in the second half of last year on two factors: the strong euro, which made exports relatively more expensive and less competitive; and the rise in the price of oil. Both these factors still pose risks, some ECB officials have recently indicated.
This means that the ECB is pushing further back into the future its notion of raising rates. The benchmark short-term rate, at 2%, has not moved for 20 months. "The time to move, I think, has not yet come," Guy Quaden, one of the ECB's governing-council members, told reporters last week. That appears to be in line with the thinking of the council on the whole.
Write to G. Thomas Sims at tom.sims@wsj.com
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