Central bank cash trumps bad news on economic growth--again

07/09/2013 4:35 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The numbers and forecasts for economic growth are predominately negative today but global stock markets don’t much care since the news is that the European Central Bank will keep the money taps open.

Today the International Monetary Fund cut its forecast for global economic growth in 2013 to 3.1% in its semi-annual update of world economic growth. Back in April the forecast called for 3.3% growth. The IMF also cut its forecast for 2014 to 3.8% from 4%. The reduced forecast can be traced to emerging economies, according to the IMF, with slower growth in Brazil, Russia, India, and China. The IMF cut its forecast to 7.75% for China in 2013 (down 0.25 percentage points from April) and for 2014 (down 0.5 percentage points from April.)  Japan is one of the few countries to get an upgrade—to 2% in 2013 from an earlier 1.5% forecast. The EuroZone economy will contract by 0.6% in 2013 (worse than the earlier 0.4% forecast.) Italy will take a worryingly big hit with its economy contracting 1.8% in 2013.

On the EuroZone periphery—otherwise known as Greece—the IOBE economic think tank in Athens has forecast that Greece’s economy will shrink by 5% in 2013. That’s worse than the previous forecast for a 4.6% contraction.

And all the way across the globe in China the rate of inflation at the consumer level picked up to an annualized 2.7% in June from 2.1% in May. Food prices rose at an annual 4.9% rate, up from 3.2% in May. Although the June inflation rate is still well below the government’s 3.5% target, the move higher reduces the odds that the People’s Bank will move to reduce interest rates in order to stimulate the country’s economy.

But none of this macro economic bad news seemed to faze markets focused on the prospects of continued cash flow in Europe. In what may have been a slip of the tongue, Joerg Asmussen, a member of the six-member executive board at the European Central Bank, said in an interview that the central bank would keep interest rates low for more than 12 months. That went well beyond ECB President’s Mario Draghi’s pledge to keep rates low for an extended period. Draghi had pointedly refused to put a timetable to his pledge. (European ministers also agreed last night to extend a further 2.5 billion euros in bailout funding to Greece—in exchange for further cuts to public sector jobs by the Greek government. A further 500 million euros would be disbursed in October if Athens kept to its agreements.)

European stocks finished at their highest level in a month. The German DAX was up 1%. The French CAC 40 climbed 0.6%. The Spanish IBEX edged lower by 0.03% and Italian stocks in Milan were off 0.06%. In the bond markets the yield on Spanish and Italian bonds moved up slightly to 4.71% and 4.42%, respectively.

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