Full-blown quantitative easing (QE), or money printing, is drawing nearer in the eurozone, says European Central Bank (ECB) president Mario Draghi. The ECB will “do what we must to raise inflation and inflation expectations as fast as possible”. Eurozone inflation is rising at just 0.4% a year, and fears of a Japan-style deflationary slump are spreading.
Draghi’s statement sent government bond yields to new record lows as prices rose – that’s because full-blown QE is expected to involve the ECB buying government bonds with printed money. Borrowing costs for Italy, France and Belgium all hit fresh all-time lows. The latest economic data, meanwhile, was mildly encouraging, with German business and investor confidence ticking up.
What the commentators said
“Finally, stabilisation,” said ING’s Carsten Brzeski. The German Ifo business confidence indicator ticked up for the first time in seven months. It is “the best single leading indicator for the German economy” and points to an “acceleration” of growth in the fourth quarter. Meanwhile, investor confidence rose in November for the first time in 2014, and GDP growth rebounded to 0.1% in the third quarter after the dip below zero in the previous three months.
This suggests that the slide in the euro and easing concerns over the stand off in Ukraine, which so dented confidence earlier this year, are now having an impact, as Capital Economics pointed out. But let’s not get carried away. This year’s annual growth rate for the German economy is set to reach just 0.8%. That seems highly unlikely to “power the eurozone recovery as had previously been hoped”, especially in view of the ongoing stagnation in the other major economies.
Most analysts now think the ECB’s ultimate goal is to implement traditional QE with government bonds, rather than the various watered-down versions it has tried in recent months. It may not launch it for a while, as it is still currently buying private-sector bonds and trying to entice banks to lend more – but these programmes are widely deemed insufficient to boost growth significantly. Whether full-blown QE can really shake the eurozone out of its torpor is another question altogether, but big liquidity injections tend to be good news for stockmarkets. Barclays, having pencilled in QE, reckons European stocks will return 18% next year, compared to 5% from the US.