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Can The Euro Zone Match China’s Growth Rate in 2015?

Economics / Euro-Zone Dec 10, 2014 - 05:06 PM GMT

By: Submissions

Economics Brett Chatz writes: The ECB is preparing to tackle stubbornly low inflation as the Euro Zone faces mounting challenges moving into 2015.

When the European Central Bank met recently, Mario Draghi emphasised precisely how important it is for the ECB to keep inflation under control. However, the last time the ECB achieved its inflation target was over two years ago. Since then, inflation has been dropping at a steady pace and now stands at close to 0. To combat historically low inflation across the Eurozone, Draghi wants to take aggressive steps by way of a quantitative easing policy. The measures likely to be taken by the European Central Bank will not be dissimilar to the QE policies adopted by the Fed in the US. These will include wide-ranging bond purchases to increase the money supply to accelerate economic growth.

According to Draghi, the European Central Bank will use all financial instruments within its purview to achieve its inflationary targets. As yet, no date for any action has been set, even with the next ECB policy meeting slated to be held in January 2015. Meanwhile, the chief economist of the European Central Bank – Peter Praet - explained that interest rates would have been cut further had they not been at historically low levels. However, Praet mentioned that the ECB would be taking concrete steps in its January meeting. At the heart of the policy considerations are whether to continue expanding central bank purchases to assist the bearish European economy. The ECB has set an inflation target for 2015 of 0.7%, but expectations are that it will come in much lower than that.

Policy Targets of the ECB

During the first week of December 2014, the ECBs Governing Council meeting did not cover any additional policy measures. Interest rates were cut in September and June of 2014, but no further action was taken at the last meeting. The ECB wants to acquire more European assets, bolstering its balance sheet and loosening economic policy. At present, the measures taken by the ECB have proven inadequate, and more widespread quantitative easing policies will need to be adopted. Inflation rate has tumbled to 0.3% for November and an anaemic recovery is the best case scenario for the Eurozone. Q2 growth of GDP was 0.1% and Q3 growth of GDP was 0.2%, hardly reasons for Europeans to celebrate. Another worrying sign was the steep decline in the Composite PMI which hit a 16 month low figure of 51.1 in November 2014. In terms of actual GDP growth, a figure of 1% is slated for 2015 and a figure of 1.5% for 2016. Monetary policy measures that are likely to be taken include purchasing sovereign debt and corporate bonds, both of which are reflective of loosening monetary policy.

Will the Chinese Housing & Credit Bubbles Burst In 2015?

Given the facts on the ground, several contrarian analysts believe that it is possible that the growth in the Eurozone could hit as high as 2% and that China's credit bubble and housing bubbles may burst resulting in a growth rate of 2% as well. Of course, this type of speculation is not rooted in anything concrete at this time. The volatility of oil prices, ballooning global debt and wide-ranging policies in central banks around the world could potentially turn the current economic realities upside down. However the failure of China to maintain robust growth will invariably hurt European countries as their economies are inextricably intertwined.

Overall though, the US dollar is likely to be strong going into the New Year on the back of better yields on U.S. Treasury notes and government bonds. The ECB will do everything in its power to prevent deflation from taking root. The Federal Reserve Bank and the ECB are clearly moving in opposite directions, with the Fed slated to increase interest rates in the first half of 2015. Provided there is no credit bubble burst in China and that a banking crisis can be staved off, the Chinese economy will continue growing at around 7% for 2015. For Europe, a weaker euro and lower oil prices could be harbingers of an improving economic outlook with a growth rate in the region of 1.1% to 1.6%.

 Brett Chatz was born in Johannesburg, Gauteng, South Africa. He attended the internationally accredited University of South Africa, where he completed the prestigious Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. In concert with the primary degree, he completed several Bachelor of Arts courses, most notably English poetry and literature. Nowadays Brett contributes informative essays for the globally renowned spread betting and CFD trading provider,

© 2014 Copyright  Brett Chatz - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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