Concern about the health of the world economy has deepened over the last three months. That explains much of the difficulty for stock markets over that period. China, long the country responsible for most of the world’s growth at the margin, rightly tops the list of worries. It faces an alarming combination of problems. But the latest new economic forecast from the International Monetary Fund shows that Europe, not China, may be even more of a pressure point. This is how the IMF’s forecasts for the different major economies have moved since its last published forecast in October:
The fall in the IMF’s estimates is almost wholly due to its economists’ decision to downgrade the main engines of western Europe — particularly Germany. It wasn’t only IMF economists who found European data disappointing of late. The Citigroup Economic Surprise data, measuring the gap between prior forecasts for macro data by private sector economists and their outcome, shows that Europe’s readouts have been savagely disappointing. The U.S. has also disappointed, but on nothing like the same scale:
Europe therefore continues to look like a contrarian buying opportunity (if not a buying opportunity for trend-followers), although a resolution to the long-standing sovereign debt crisis, and the related problem for Europe’s banks, appears to be a necessary condition before any sustained rebound can happen.
What might be the catalyst? As might be expected, the most popular answer lies with central banks. The European Central Bank meets on Thursday for what is likely to be the week’s biggest set-piece market event. Last year was dominated by talk of how the ECB could engineer a shift from easing to tightening once again, which Mario Draghi, its president, appeared to achieve well. But now we are back to discussing a set of initials that brings back painful memories of his predecessor, Jean-Claude Trichet, and the crisis in European sovereign debt at the beginning of this decade: TLTRO. Targeted Long-Term Refinancing Operations were a clever way to refinance the euro zone’s ailing banks by allowing them to borrow for the long-term at preferential rates, in return for a pledge that the money would be used to finance productive businesses. They were launched in 2014 as the successor to the LTROs, the desperation tactic from 2011 and 2012 to refinance the banks during the worst of the crisis.
Thus there is much hope that the ECB will use the need to renew the TLTRO to avoid a tightening as a convenient cover for engaging in some easing policy again, and that Draghi could provide a strong steer in that direction this week. Alternatively, this may be a last opportunity for a proactive move to avert a recession, as Marcus Ashworth suggested in Bloomberg Opinion this week.
Reference: ฺ Bloomberg
Read More: https://www.bloomberg.
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