The monetary policy strategy of the European Central Bank (ECB) focuses on what the entity itself calls “datadependence”, and the data are beginning to show that the euro zone economy is suffering after successive increases in interest rates up to 4.5%.
“The behavior is disappointing” in the euro zone and “the indicators point to an economic contraction also in December, which confirms the possibility of a technical recession in the second half of 2023 and weak short-term prospects,” the vice president stated yesterday. of the European Central Bank (ECB), Luis de Guindos, at the inauguration in Madrid of the Spain Investors Day.
Their predictions for the fourth quarter of 2023, added to the 0.1% decline in the third, outline the new scenario of technical recession. Just a month ago, the ECB itself predicted that the last three months of the year would end with growth, even if it was barely one tenth. Guindos yesterday pointed to a "generalized" weakening of the economy and also to "the first signs of correction in the labor market", consisting of a decrease in vacancies. The unemployment rate in the euro zone closed November at 6.4%, the same percentage as a month before and a historically low level.
The darkening of economic forecasts is completed by a report published on Tuesday by the World Bank that points to an increase in Eurozone GDP this year of 0.4%, compared to the 1.3% previously forecast. It is lower than that of the United States and will occur in an unfavorable international context, since the world economy is heading, according to what it says, for a five-year period of low growth.
The new forecast also gives arguments to those in favor of anticipating interest rate cuts. The governor of the Bank of Portugal, Mário Centeno, assured on Tuesday that they could occur “earlier” than expected, even without needing to reach May.
Guindos yesterday stuck to the slogan that the president of the central bank, Christine Lagarde, keeps repeating: “We think that the current level of interest rates, maintained for a sufficient time, will make a sufficient contribution to the return of inflation to its objective ”.
The goal is 2% and, although the euro zone has managed to significantly contain price increases, it is not exempt from rebounds. In December, year-on-year inflation increased by five tenths, to 2.9%, compared to 2.4% the previous month, which is not encouraging when, in addition, the economy was declining.
The euro zone will also face two internal challenges next year, explained the vice president of the ECB. The first is the reduction of the central bank's balance sheet at a monthly rate of 7.5 billion, which will mean a means of restricting credit in addition to high interest rates. The other challenge has to do with the EU's fiscal rules, which will return accounting discipline to community partners and force the public deficit to be reduced. For Guindos, it represents a “powerful signal” to the markets, and “it is crucial that it be implemented appropriately and without delays.”
In the same forum, the governor of the Bank of Spain, Pablo Hernández de Cos, expressed his fear that the current political uncertainty will end up negatively affecting investment decisions by companies and thus economic growth. He explained that, according to the latest Bank of Spain Survey on Business Activity, in the last quarter of 2023, companies perceived, for the second consecutive quarter, an increase in uncertainty about economic policy. If maintained, he warned, these dynamics “could have a negative impact on business investment decisions.”
