If there has been one continent through which the travails of the world economy and the Global Financial Crisis it has been Europe. Summers come and go and everyone seems to hold a new reason to be fearful – Greece, Portugal, Spain, and Cyprus. That is likely to continue through 2016 according to Jeremy Cook, Chief Economist at the international payments company, World First, although we have a new dynamic to be wary of; interest rates at, or in some cases below, 0%.
Jeremy explains, the European Central Bank’s policy meeting in March saw a raft of measures introduced in a bid to stimulate the European economy. Inflation remains weak, unemployment high, wage growth low and confidence disparate. At the heart of the European Central Bank’s plans were cuts in interest rates in a bid to get consumers spending and borrowing more, banks to increase lending and businesses to spend more on investment.
The cut in the ECB’s main rate to 0% was a bit of a surprise and comes more as a signal than an overt policy decision – a sign to markets and investors that they do not want them holding on to euros. Alongside a negative deposit rate of -0.4% i.e. banks being charged for lodging money with the central bank and not putting it to work via lending policymakers are making consumption as attractive as it can be.
Look to consumer confidence and retail sales figures in the coming months to see if it is working.
Since the meeting there has been a lot of shrugging going on in currency markets; everything is a bit of a mess but the euro has strengthened slightly. For those British online sellers who sell in Europe the past few weeks have been manna from heaven with GBPEUR trading towards the lowest levels in around 15 months.
In the short term further joy could be on its way for those selling into Europe. ECB President Marui Draghi told the press that “from today’s perspective, and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further”. With Draghi seemingly putting in a floor in rate expectations should we see a pick-up in Eurozone inflation and growth the scene is set for euro strength; UK goods are only going to look cheaper to Eurozone buyers.
In the longer term we still believe that sterling should recover once the spectre of the referendum is dealt with, based on a vote to remain but for now the scene is set for higher European consumption and UK online seller sector to benefit.
