Optimism Vanishes on Softening Europe, Weak U.S. Production

Despite strong GDP growth at the end of 2015, recent data indicates a softening in global growth that is worrying economists.

In Europe, the European Central Bank announced that it would revisit its stimulus program this month after Eurozone inflation fell to -0.2% for the Consumer Price Index, a sharp reversal from a 0.3% increase in January. Inflation in the CPI has continued to grow weaker throughout 2014 and 2015, despite a broad bond-buying program by the ECB that was designed to cause inflation to rise.

Despite strong GDP growth at the end of 2015, recent data indicates a softening in global growth that is worrying economists.

In Europe, the European Central Bank announced that it would revisit its stimulus program this month after Eurozone inflation fell to -0.2% for the Consumer Price Index, a sharp reversal from a 0.3% increase in January. Inflation in the CPI has continued to grow weaker throughout 2014 and 2015, despite a broad bond-buying program by the ECB that was designed to cause inflation to rise.

Consumer prices on a year-over-year basis, which were rising around 3% in 2011 and 2012, fell to 0.5% in 2014 when the ECB announced a broad asset-purchasing program, despite complaints from the Bundesbank that inflation was too high. The heterodox view from Germany was offset by broader data and economic consensus that price growth was too weak in Europe, and was threatened by likely deflation in 2015.

Last year, that deflation appeared, with prices falling more than 0.5% on a year-over-year basis in early 2015. While price growth improved to 0.3% in mid-2015 and early 2016, the sudden decline to the lowest CPI rate since early 2015 indicates that the ECB’s bond buying program is not enough to spur consumer demand.

With a price growth target of 2% still far from the ECB’s reach, the bank’s president Mario Draghi will gather policymakers and bankers to a meeting on March 9th and 10th to discuss possible actions to make monetary policy more stimulative. While the ECB recently increased its bond-buying program and it has hinted to the market that it will do whatever it takes to cause prices to rise, other policymakers are dismissing the power of the ECB to stimulate the nation bloc’s economies.

Growing concerns about deflation have been voiced by policymakers throughout Europe. In an interview, published last weekend, ECB Governing Council member Francois Villeroy de Galhau said, “the danger we face is undoubtedly deflation and not inflation,” adding that low energy prices are counteracting the ECB’s aggressive moves.

Falling Home Sales, Poor Manufacturing Data

In the U.S., separate reports indicate that weak growth is not limited to Europe, as pending home sales surprisingly fell sharply and manufacturing contracted.

Pending home sales fell 2.5%, despite expectations of 0.5% growth. That follows a weak 0.1% growth in December, indicating a sharper slowdown in demand for homes as cash-strapped Americans face continually higher house prices.

At the same time, manufacturing shrank, according to the Chicago Federal Reserve. The Chicago Fed’s purchasing manager index fell to 47.6 versus an expectation of 52.9, a sharp plummet from 55.6 in January. A steep decline in production and new orders caused the contraction, as manufacturers fret that there is less spending and less demand in the broader economy.

However, MNI Indicators Chief Economist Philip Uglow noted in a statement that manufacturing weakness plagued the last quarter of 2014, so an improvement might be forthcoming by March. “If one looks beyond the gyrations seen over the past three months then trend activity has been running a little below the 50 neutral mark, highlighting continued sluggish activity levels, with manufacturers under particular pressure. Still, given the weakness in Q4, it looks like activity should pick up during Q1,” he said.