Eurozone: Retail sales betray economic frailty

Joaquín Almunia, Vice-President of the European Commission in charge of Competition (on the right), and Michel Barnier, Member of the EC in charge of Internal Market and Services, gave a press conference on the new rules on Payment Services for the benefit of consumers and retailers. In order to adapt EU payments market to the opportunities of the single market and to support the growth of the EU economy, the European Commission adopted a package including: a new payment Services Directive (“PSD2”) and a proposal for regulation on interchange fees for card-based payment transactions. (EC Audiovisual Services 24/7/2013).

Retail sales are an infallible measurement of the internal dynamism or its absence in every economy. They are tightly associated with consumption which is by far the largest component of Gross Domestic Product, investments and exports accounting for the rest of it. For quite some time now retail trade dynamism in Eurozone is practically non-existent and its course oscillates around zero. The weak demand in the retailing sector of the economy is also behind the subdue pressures on consumer prices keeping inflation well below the 2% benchmark. In short retail trade dynamism in Eurozone is totally absent.

The latest data from this front are once more on the negative side. According to Eurostat, the EU statistical service, in June 2013 compared with May the volume of retail trade decreased by 0.5% in euro area and by 0.3% in EU27. With this in mind, the widespread opinion powered by some economic analysts, that Eurozone is about to exit from its long recession must be treated with caution. The latest such over-optimistic predictions are based on the announcement by the market analysis group, Sentix, and reported by ‘Investing.com’. Sentix stated that “Investor confidence in the euro zone for August improved to the highest level in six months, amid easing concerns over the outlook for the region’s economy, data showed on Monday”.

Growth out of sight

Still Eurostat insists that “In June 2013, compared with June 2012, the retail sales index dropped by 0.9% in the euro area”. It’s not only that. Eurostat also announced its flash estimate for July inflation. The relevant Press release goes like this, “Euro area annual inflation is expected to be 1.6% in July 2013, stable compared with June”. As every first year student of Economics knows inflation below the 2% benchmark means subdue economic activity.

It’s not by accident that the European Central Bank has set the inflation benchmark for policy action at 2%. Below that level the bank believes economic activity is subdue. Mind you 1.6% is not even close to 2%, it’s rather well below it meaning that Eurozone’s economy is still sleepy. This is exactly what Mario Draghi, the President of ECB, said last week while presenting the new central bank’s philosophy cantered around a very relaxed monetary policy option.

He said, “Underlying price pressures in the euro area are expected to remain subdued over the medium term. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. Inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. At the same time, recent confidence indicators based on survey data have shown some further improvement from low levels and tentatively confirm the expectation of a stabilisation in economic activity”.

Beware; Draghi said that data “tentatively confirm the expectation of a stabilisation in economic activity” and he also left to be clearly understood that the ECB wants the inflation rate a bit higher closer to 2%. If the President of ECB knows something more than any economic analyst, then the Eurozone in his mind doesn’t seem quite ready to abandon its long-term recession and achieve a new growth path. Stabilisation is of course the first step to growth but in the case of Eurozone the two stages seem to stand very far apart time-wise. Draghi clearly believes this. That is why he opted for a new policy line.

Monetary stimulus

The new extraordinary measures announced by ECB are meant to revive Eurozone’s economy. If the economy was able to do that by itself the central bank wouldn’t have changed altogether its policy lines. Not to forget that Draghi confirmed last week the ECB will offer unlimited new liquidity to Eurozone’s banks at interest rates very close to zero. Obviously Draghi hopes that some of those freshly printed euro will be lent to the real economy and also to governments and through them be used to bolster consumption and investments.

The banks can’t do it

This is very close to ECB’s undertaking a new strategy nearing the forbidden fiscal policy constellation of measures. If growth was around the corner the ECB wouldn’t have risked to be seen as overshooting its mandate. On top of that most of Eurozone’s commercial banks avoid according new loans and even return to ECB large parts of the liquidity already offered to them so far.

Clearly the inability of the lenders to play their part of the growth game and pass the new money to the real economy is presently the major impediment to Eurozone’s recovery. That’s why the ECB says it will offer even more and cheaper money. The problem is how this new liquidity can reach the points where it is badly needed namely in the south. This is Draghi’s real bet.