European policymakers must dramatically up their game if they are to kick-start growth and stave off deflation across the beleaguered region, economists have claimed.
Recently published GDP figures highlighted the fragility of the situation as the eurozone’s economic recovery ground to a complete halt in the second quarter. Recent months have also seen renewed volatility in the region, with geopolitical tensions in Ukraine as well as the demise of Portugal’s biggest lender Banco Esprito Santo.
Jonathan Loynes, chief European economist at Capital Economics, said: ‘The stagnation of the eurozone economy in the second quarter further underlined the need for the European Central Bank (ECB) to take bolder policy action to address the continued weakness of the economy and the associated risks of deflation.’
In the two years since ECB president Mario Draghi, promised to do ‘whatever it takes’ to safeguard the eurozone from collapse, the euro has been steadily strengthening against the dollar – and therefore depriving the region of a competitive edge - while inflation, at 0.4% in July, is on the precipice of turning into deflation.
The ECB has already introduced radical measures in a bid to boost its ailing economy. In June, it not only slashed its benchmark interest rate to 0.15% but took its deposit rate for banks into negative territory, at -0.1%.
But experts believe the ECB must dig deeper still. Loynes explained that overall, the latest GDP numbers reinforced the view that the eurozone remains too weak to either help peripheral countries tackle their debt problems or eliminate the dangers of deflation. He added: ‘We still believe the ECB needs to implement further policy action, probably in the form of full-scale quantitative easing, to try to bring the euro down and re-ignite the recovery.’
James McCann, UK & Europe economist at Standard Life Investments, agrees with this assessment. He said: ‘An all-out QE programme would help support the nominal growth outlook in the eurozone, helping support the sustainability of the enormous level of debt in the currency union.’
Despite the backdrop, Joel Copp-Barton, European equities product director at Invesco Perpetual, believes there is positive news to take in. He said: ‘The outlook is a good deal better than last quarter’s GDP numbers appear: we believe full-year growth numbers will be trimmed but not killed.’
He noted that the recovery still remains in its infancy and despite the subdued headline progress there were a number of positives within the breakdown such as Spain and Portugal growing by 0.6% on the quarter.
He added: ‘The eurozone should benefit from an acceleration in growth from the other major economies. The US looks to be on a robust footing, data from China seem to be firmer and Europe’s exports should increasingly benefit from the currency tailwind.’