Financial markets are set to begin a fresh selloff as investors take a fresh look at how the eurozone is coping with the fallout from the financial and economic fallout from its crisis.
Key points:The eurozone is set to start a selloff on Thursday after the latest data on employment was released”The eurozone economy will not grow for another year, as expected, and growth is set not to exceed 1.2% this year”Eurozone leaders are due to decide whether to keep borrowing and spending in line with the International Monetary Fund’s forecasts on Thursday”The ECB will be the only central bank to keep its policy rate unchanged, and its key rate at zero for another four years,” said Michael O’Sullivan, chief economist at the investment bank Societe Generale.
“The fall in confidence in the eurozone economy, combined with the ECB’s support for banks, has helped the ECB to avoid a severe contractionary policy response.”
Analysts expect the eurozone to fall back into recession as the ECB acts to prop up the banking system.
“If the ECB were to act to support the banks and/or support the economy by raising its deposit rate, it could help offset the negative effects of the financial shock to the banking sector and the economy,” O’Brien said.
“It is not clear what will happen in the event of a negative shock to GDP, but it is likely that the ECB will continue to increase its quantitative easing (QE) programme and support the banking and economy in the longer run.”
“In the longer term, the ECB is likely to continue to support banks and the wider economy with the support of its QE programme, with the aim of keeping the economy strong,” he said.
Economists have been expecting the eurozone’s economic performance to deteriorate, and have been forecasting a sharp fall in the number of jobs in the country.
In a note to clients on Thursday, Societé Generale warned that the fall in GDP figures was a reflection of “unwanted” spending.
“We believe that the impact of a prolonged downturn will have an adverse impact on the labour market and on wages and employment,” the bank wrote.
“This will further impact on unemployment, which has been steadily rising for the past three quarters.”
The fall will likely affect companies that have cut jobs to reduce costs, and the cost of hiring workers will also rise, it added.
However, economists believe the eurozone has still a strong chance of re-recovering in the short term.
“As we approach the end of QE, we believe the recovery in the euro area is still a long way from being completely healed,” Ollie Beaumont, economist at BNP Paribas, said.
“We think the next few months will be crucial in determining the extent to which we can re-inflate the recovery and the degree to which the eurozone remains in recession.”
“If we are to see a significant recovery, the economy needs to show sustained growth over the medium term,” he added.
The Bank of England has kept its interest rate unchanged at 0.25% for the last few months and the Bank of International Settlements has kept rates unchanged at a level of 0.3%.
The Bank is due to announce its decision on Thursday on whether to stay in its bond-buying programme, which began on July 1, and also on whether it will raise interest rates by a further 0.5 percentage points.
On Thursday, the Bank’s deputy governor, John Williams, said he believed the Bank would not need to raise rates.
However the Bank is unlikely to cut its rate by more than 0.1 percentage point.