The global economic crisis has had a significant impact on all of us here at SocGen. Investors are now more cautious and are watching inflation, monetary policy and other factors to see how the economies of Europe and the United States respond.
Inflation remains a prominent topic in Europe. The European Central Bank has been struggling to keep deflation at bay. The ECB raised rates in September, and most observers expect more hikes in 2019. The ECB’s tightening has increased borrowing costs for Europe’s deficit countries and set back the rate of eurozone growth. European markets have also been choppy this year, with a number of recessions, 10% stock market drops and a number of negative earnings warnings in the past few months.
The ECB announced on September 25 that it would begin purchases of debt from banks in an effort to ease the ECB’s own funding bias. The ECB’s purchases remain a work in progress. While its first-ever bond purchase program received a positive response from market participants, others remain skeptical. The ECB’s current program is likely to buy several trillion euros of bonds over the course of the next few years. In the coming months and years, the ECB will likely continue to purchase bonds to help finance its longer-term refinancing operations.
Even with the recent rate hike, the ECB is unlikely to reduce its interest rate again in the short-term. It’s already undershooting its inflation target and its rate increase in
SocGen’s View on European Economic Growth
European growth has remained relatively subdued over the past few years. The continent’s large and rapidly growing economies have outpaced those of many other regions of the globe. This has meant that Europe has seen stronger than expected growth compared to other regions of the world.
However, growth has recently begun to slow. The pace of growth in Europe is set to slow further as the effects of the economic crisis begin to fade and inflation resumes its upward path. In an effort to sustain robust growth, the European Central Bank raised interest rates in September. The ECB is expected to hike them again in November.
The Eurozone’s Growth
Growth in the Eurozone is set to slow in the second half of this year. In the months ahead, several major economies in the Eurozone are due to report their second-quarter growth figures. Italy, Spain, France and Germany are all expected to report negative growth in the second quarter of this year. Overall, the Eurozone is expected to grow by just 0.3% this year.
How the ECB Can Help
The ECB can help by keeping interest rates low and protecting the euro against further appreciation. The ECB can also buy government bonds from European countries that have been adversely affected by the economic crisis. Finally, the ECB can also provide funds to banks in Europe that are lending too much and need support to restock their shelves.
SocGen’s Track Record
Our track record in Europe is particularly impressive. While our overall investment strategy focuses on the United States and Asia, much of our investment bank is focused on Europe. During the economic crisis, SocGen’s main investment thesis hinged on the success of European banks that were able to weather the financial storm. We have been particularly interested in the progress of banks in Spain, Italy and France.
Europe’s Monetary Policy
Although the ECB raised interest rates in September, it remains committed to achieving low inflation (2%). In the coming months and years, the ECB will likely continue to purchase bonds to help finance its longer-term refinancing operations. The ECB swaps today’s money for tomorrow’s equivalents in Treasury bonds or mortgage 30-year bonds. This operation is known as a refinancing.
We remain concerned about the long-term growth prospects of Europe. The economic performance of Europe’s large and rapidly growing economies has been impressive compared to that of other regions of the world.
But Europe’s economic growth is set to slow in the second half of this year. In the months ahead, several major economies in the Eurozone are due to report their second-quarter growth figures. Italy, Spain, France and Germany are all expected to report negative growth in the second quarter of this year. Overall, the Eurozone is expected to grow by just 0.3% this year.
Investors should be careful when making long-term investments. The euro has been recovering nicely since the ECB’s decision to let it stand. But it’s still not safe to put all your eggs in one basket. As the economic crisis in Europe recedes into the past, investors will increasingly scrutiny the long-term impact of each decision and outcome.