Frankfurt, Germany.
After years of generating concerns about its finances, the slow recovery of the economy and even the threat of falling into deflation, the euro zone starts to show signs of improvement. The good news for the world economy is hampered, however, by the continued slowdown in China.
President of the European Central Bank, Mario Draghi, said Wednesday that the stimulus plan that has followed the entity begins to bear fruit and downplayed doubts that the ECB will end asset purchases earlier than planned.
The press conference Draghi was interrupted by a protester who rose to table where the economist and shouted “end the dictatorship of the ECB”. Once the incident passed, Draghi said the stimulus policies are “taking root” in the economy, which can be seen in greater access to credit and the fall in real interest rates. “The economy of the euro area will become more momentum since late 2014,” he said.
“We expect the economic recovery to broaden and strengthen gradually,” he noted. Draghi, however, stressed that the recovery depends on all policies recommended by the ECB are implemented. These include extremely low interest rates that the body remained intact on Wednesday; Cheap loans to four years for banks and purchase program launched sovereign debt last month and will not end until September 2016.
On Tuesday, the International Monetary Fund raised its growth forecast Eurozone from 1.2% to 1.5%. Although there is a slight expansion compared to the figure for other countries is a positive development for a region that last year barely escaped recession close with three of their last six. The IMF, in any case, warned that the stimulus program the ECB could have harmful effects on the economy and markets if it is not backed by structural reforms and efforts to address the problem of nonperforming loans from the bank.
The Chinese economy, meanwhile, posted its slowest quarterly growth since 2009, which shows clearly the power loss that was until recently a growth engine of the world economy and particularly in Latin America. China grew 7% yoy in the first quarter, slowing from 7.3% yoy in the fourth quarter of last year. The figure leaves the government with little margin for error to achieve the growth targets set for 7% this year.
The authorities feel pressure to implement policies stimulus fiscal and monetary areas at a time when they also try to avoid an incentive to increase borrowing and accent overcapacity in the areas of real estate and heavy industry.
Beijing has to strike a delicate balancing act between making the economy more dependent on domestic consumption and pollutes less, on one hand, but on the other to expand dynamically to generate enough jobs and avoid any possibility of social unrest occur.
Other figures released Wednesday suggest a weakening economy and some believe that the government does not take long to take action on the matter. “We still have plenty of ammunition at their disposal,” said Brian Jackson, an economist at the US consulting firm IHS Global Insight.
Draghi, meanwhile, listed a long list of reasons for the current recovery Eurozone will be lasting. The drop in oil prices, he said, help stimulus policies of the central bank to revive the economy. The official also highlighted the increasing confidence of both individuals and businesses.
However, those same positive symptoms have raised concerns in the markets that the ECB may terminate or reduce the scale of the stimulus ahead of schedule when the first signs that inflation is about to appear 2% target set by the agency.
Consumer prices fell 0.1% between March 2014 and March 2015. “I’m quite surprised by the attention that has been paid to a possible exit from a program that does just started implementing one month, “Draghi said, adding that is like asking a marathon runner if it will reach the finish after running the first mile he said.
On another plane, Draghi downplayed suggestions that the ECB will struggle to find enough bonds to buy your monthly quota of 60,000 million euros over the next 18 months. The company promised not acquire debt whose performance is below its deposit rate, which is at least 0.20%.
However, an increasing number of European government bonds have negative returns, raising questions about whether the ECB can find sufficient assets in countries like Germany, the largest economy in the eurozone. The rating agency Moody’s Investors Service warned on Tuesday that the central bank could be exhausting to buy assets by year-end. “We see no problems,” Draghi stressed. “Such concerns are premature, certainly no current evidence supports them.”
The yield on the benchmark 10-year German government, known as bund, hit a new record low on Wednesday to reach 0.107%. The rate of 30-year bonds was 0.52%, another record low. Debts to 10 years the governments of Spain and Italy reached 1.28% and 1.18% respectively on Wednesday. “It is not inconceivable that the performance of 10-year German bund drops below 0.2%,” said Alan Wilde, head of fixed income at Barings Asset Management.
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