Draghi reserved about Eurozone’s growth prospects

Martin Schulz, European Parliament President (on the right) receives Mario Draghi, ECB President in Strasbourg (European Parliament / Audiovisual Services).

Yesterday, Mario Draghi, President of the European Central Bank, during the Press conference following the meeting of the Governing Council, in answering a journalist’s question appeared quite reserved about Eurozone’s growth prospects. Despite the fact that ECB’s staff projections for 2013 have been revised upwards, estimates for 2014 growth potential are now downgraded. Not to forget that the overall assessment for 2013 remains negative with ECB predicting that real GDP should declining by 0.4% this year. That’s why ECB’s Governing Council had to face a possible reduction of central bank’s basic interest rate but at the end left it unchanged at 0.5%.

In any case Draghi said that the Governing Council “expects the key ECB interest rates to remain at present or lower levels for an extended period of time”. This statement comes under the new ECB policy stance of ‘forward guidance’ designed to reassure everybody that central bank interest rates will remain at close to zero levels in the foreseeable future and in any case for as long as it is needed to provide support to the resumption of economic activity.

Cheap and abundant money

In this way the ECB guarantees that monetary policy will remain accommodative until Eurozone enters in a sustainable path of noticeable growth. As Draghi indirectly left to be understood ECB’s mandate doesn’t permit a fixed conditionality of monetary policy to macroeconomic factors like growth and unemployment, as the Bank of England does. Still ECB is decisively perusing its accommodative policy facilitating the real economy to start growing again with substantial rates.

Draghi’s reserves about Eurozone’s growth prospects were based also on the fact that “The risks surrounding the economic outlook for the euro area continue to be on the downside. Recent developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include higher commodity prices in the context of renewed geopolitical tensions, weaker than expected global demand and slow or insufficient implementation of structural reforms in euro area countries”. In short Draghi is not at all sure that the 0.3% increase of Eurozone’s GDP during the second quarter of 2013 is a good base to predict stronger growth in the immediate future.

Questionable growth

Reserves about Eurozone’s growth prospects stem also from the financial sector. According to ECB’s data the annual growth rate of loans to households remained at 0.3% in July, largely unchanged since many months. This near to zero rate of increase is much lower than inflation, meaning that the real value of loans to households decreases constantly. On top of that a 0.3% increase in household loan balances is also much lower than the interest rates on them, estimated at around 6% to 11%. This signifies that no new loans are accorded to individuals while there is extended deleveraging in household credit. Obviously this is not good news for growth, despite the fact that consumer spending increases noticeably.

Bad news for growth comes also from bank loan balances to the real business sector (non-financial agents). Again according to ECB data “The annual rate of change of loans to non-financial corporations was -2.8% in July, compared with -2.3% in June”. Draghi translated it like this, “Weak loan dynamics continue to reflect primarily the current stage of the business cycle, heightened credit risk and the ongoing adjustment of financial and non-financial sector balance sheets”.

In reality ECB is not at all sure that the worse is behind Eurozone. Geopolitical risks like an US hit in Syria and its possible repercussions may drive consumer spending and business investments quite deep in the negative area and send Eurozone back to the downward part of the curve. Not to forget that Eurozone was losing parts of its GDP for six quarters in a row until the first three months of this year.