Friday, January 13, 2006

Is The ECB Measured-Pace Cycle Over?

Well, not unexpectedly, the ECB decided to leave its main refinancing rate unchanged at 2.25% yesterday. Rather more surprisingly (for some at least) the German Federal Statistical agency reported that German economic growth ground to a halt at the end of 2005.

According to the Financial Times:

Johann Hahlen, president of the federal statistics office, said that growth last year had been based largely on exports, with domestic demand remaining weak. “Broad and self-supporting growth is still not being observed”.

Again according to the FT, Herr Hahlen's comments "surprised economists, who had expected growth to continue and have become increasingly upbeat about the outlook in 2006". I'm surpised the FT can be so blazé in saying 'economists': they certainly didn't surprise me. I think it was reasonably clear that this was coming. If I am surprised by anything it is that it has come so quickly.

So where do we go from here? Well Jean-Claude Trichet, the ECB president, has been trotting out the party line to the effect “we have to be vigilant as regards inflation”, but with inflation now falling back (in December the harmonised rate slipped back a fraction to 2.2% from the 2.3% in the year to November) and with virtually no 'second round oil rise' effects in evidence this argument is going to sound increasingly hollow. Couple this with the ongoing 'low- growth' environment in the Eurozone (we're still awaiting the sort of news from Italy which will again I imagine surprise 'economists') and you can see that there will be few reasons to justify any serious interest rate rises. At the limit we may just see one more quarter point rise squeezed-in before year's end. Aside from that the ECB tightening cycle is, as I suggest, just about done.

Since it has recently become fashionableto try to predict the future, here are my 2006 forecasts.

In first, and most prominent, place: the dollar will not decline sharply in 2006. Change on the margin is a much harder call, but, on balance, I expect the euro to nudge down during 2006. The principal factors here will be the interest-rate and growth differential with the US.

Global growth will be a touch slower than in 2005.

Germany and Japan will not have sustained, internal-demand driven, recoveries.

Japan will not 'break-lose-decsively from the chains of deflation.

China and India will continue to grow pretty much as they are currently doing.

Turkey will continue to be the principal growth tiger in the EU orbit.

Ireland and Spain will continue to have property bubbles.

The US will grow a tad more slowly in 2006. It will not enter recession. The CA deficit problem may well grow.

There will be time enough to forecast 2007 when we have had time to see just how near the mark our 2006 forecasts are.

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