There was little in Mario Draghi’s comments in Germany on Wednesday to indicate that the European Central Bank plans to stop pumping cheap money in to the eurozone anytime soon.
Some expected him to use the platform of a speech to a gathering of Nobel economics laureates and students to say that a long period of growth across the 19-member currency bloc warranted a reduction in the ECB’s quantitative easing stimulus programme.
It’s more than two years since Draghi announced a €1.1tn bond-buying programme at a rate of €60bn a month to act as a drip feed for the ailing eurozone economy.
At its launch, Draghi said the scheme would end in September 2017, but the patient’s waning energy levels meant this was subsequently extended into next year.
There are still good months and bad months for the eurozone, but in the main, it is looking healthier than at any time in the last five years and many Germans in particular, keen for higher interest on their savings, want the drip withdrawn and interest rates to rise.
To emphasise the point, eurozone economic surveys for July were buoyed by improvements in manufacturing output while employment continued to grow and business investment remained stable.
The data provider Markit said its combined purchasing managers’ index, which covers manufacturing, services and construction industries, edged higher from 55.7 to 55.8 in August as manufacturing exports improved significantly. That’s a healthy level of activity and could be seen as an indicator of economic wellbeing.
Why then is Draghi still keeping interest rates at near zero and flooding the system with cheap money? He could at least have said the day is nearing when the central bank can step back. But why would he when other indicators point in the opposite direction? Inflation remains subdued and so do wages. Without a surge in wages across the bloc, and not just in Germany, shop price inflation is going nowhere.
Oil prices also show no sign of rising significantly. Brent crude has failed to rise much above $55 a barrel over the last year and is currently at $51.50, less than half its value in 2014.
If anything Draghi might offer more stimulus given that the euro has picked up in value against most currencies and especially against the pound, possibly putting a brake on exports. But he won’t because the average rise is to a level still well below that seen before the 2008 financial crash.
There are also the warning signs hanging over the global economy. All the indications are that growth in the G7 economies and emerging markets will continue for the rest of the year, but then the 10-year recovery from the crash looks to be running out of steam.
Wall Street analysts at HSBC, Citigroup and Morgan Stanley said there was evidence global markets had entered the last stage of their rallies before the current business cycle comes to an end.
The analysts said stock market investors were ignoring the corporate sector’s flagging profits. Money was continuing to pour into equities anyway, increasing valuations across the board. The mismatch with profits had grown to levels not seen since the crash, so at the very least a correction in share prices was likely.
Booming stock markets are not supposed to be a crucial element in the mix of factors underpinning sustainable economic forecasts. However, they play an important role in supporting business and consumer confidence, which means a correction could trigger a recession, at least in vulnerable countries.
The UK could be one of them, according to UBS, which says Britain’s recovery from the EU vote is almost illusory. Its model of the UK economy predicts stagnation in the near future and an end to talk of rising interest rates from not just the ECB, but the Bank of England as well.
WPP investors likely to hold firm
Sir Martin Sorrell believes his advertising clients are already nervous about the outlook for economic growth. He says ad budgets have suffered cuts that will reduce his company WPP’s 2017 growth rate from the 3.1% prediction made last year, and 2% signalled in March, to between 0% and 1%.
Before you shed a tear for the the perma-tanned WPP boss, who raked in £70m in salary, shares and bonuses in 2015 and £48m last year, his investors are likely to stick with him. They have benefited from 3% profit growth since 2013, which for a business with near-20% profit margins that have little extra headroom, is impressive.
Sorrell promises a bounce-back as firms seek to advertise their way out of stagnant sales. Will clients give him their money or will they prefer Google and Facebook? If the global economy dips and stock markets slide, they might do neither.