Today's ECB meeting a no-brainer

Wednesday, May 04, 2005

Unemployment with 8.9 percent at a 7-month high , the first contraction in manufacturing since August 2003 and a preliminary estimate that inflation remained stable at 2.1 percent in April will make today's meeting of the European Central Bank (ECB) Governing Council a no-brainer. Jammed in between the alarming economic outlook described in the April monthly bulletin of the ECB and fears of accelerating prices the key interest rate will be left untouched at the level of two percent where it has been sitting since June 2003.
Analysts are forecasting that the ECB will stay put for the rest of 2005 too, citing the above mentioned factors that do not allow room for any movement. Politicians in most of the 12 member states of the Euro area nevertheless argue that the low level of inflation should allow the ECB to cut the main refinancing rate one more time to bring economic growth back on track. The EU cut its forecast for GDP growth from two to 1.6 percent in 2005 three weeks ago, after it had grown two percent in 2004. Much of the slower growth is attributed to the strong Euro that hampered exports from the 12-nation zone whose economies rely heavily on exports of machinery goods and durables. But recently some EU countries have begun running trade deficits with China too, raising fears the EU could over time face the same problems as the United States. The deindustrialization of the common currency area can also be gauged from the worsening state of direct investments that saw a net outflow of 13.1 billion Euros in January alone. This is more than a third of the net outflow of 37.1 billion Euros in 2004.
While consumer prices seem still to be in check at the current rate of 2.1 percent, higher oil prices have already crept into industrial producer prices that showed a year-on-year uptick of 4.2 percent in February compared to a plus of 2.3 percent in 2004.
Key EU figures are compiled on this sheet.
In combination with a smaller rise of labor costs in 2004 - 2.3 vs. 2.7 percent in 2003 - companies nevertheless managed to eke out record profits in 2004. But these profits came mostly at the expense of the labor market. The wealthy core EU countries are threatened by the constantly growing number of unemployed people that feel evicted from the working community for the sake of higher corporate profits. Deutsche Bank's announcement to cut its labor force despite record profits has led to a huge uproar of criticism. Representatives of Germany's ruling social democrat party are beginning to voice their criticism of a market economy that advances at the expense of the people and the welfare systems, long hailed as a poster of stability and social peace.
As the ECB holds a press conference after its meeting, ad-hoc questions will probably center on the issue how the ECB will balance the threat of ongoing slow growth and simultaneous price pressures. To see a webcast of the live press conference at 14.30 CET jump to this link.


Wikinvest Wire