‘Full-blown recession’ unless ECB changes come

THE EU and Ireland are heading into a fresh recession next year unless the European Central Bank initiates a number of actions — including dropping interest rates to 0.5% — NCB stockbrokers economist Brian Devine warned yesterday.

“The growth picture in the euro area has declined rapidly, with euro area PMIs pointing to recession in Q4 2011,” he said.

“Unless the ECB acts there will be a full-blown annual recession in the euro area in 2012, with time running out to prevent this from occurring.”

Mr Devine said the ECB should be loosening monetary policy significantly, including un-sterilised purchases of sovereign debt as it is justified by the output gap, employment outlook, growth outlook, lending outlook and consequently inflation outlook.

“The ECB should follow the lead of the US Federal Reserve and the Bank of England and bring its rate to the lower bound. The lower bound for the ECB to date has been 1%, but we see no reason that it should not be brought to 0.5% with the deposit rate brought to 0.25%,” he said.

Mr Devine said the Bank of England’s rationale for stopping is likely to resonate with the ECB given the prevalence of tracker-like products in Europe relative to the US.

“The Federal Reserve and the Bank of England will be on hold for the entirety of 2012 and the first half of 2013. The ECB is unlikely to act decisively and implement a 75bps cut to get its rate to 0.5% in one foul swoop, but we believe that it will get there reluctantly and need to hold it there for all of 2012,” he said.

“The ECB needs to boost economic activity not just worry about banks profitability — the former will aid the latter.”

Yesterday, the seasonally adjusted NCB purchasing managers’ index indicated that operating conditions in the Irish manufacturing sector deteriorated modestly during November as both output and new orders fell following increases in October.

“Meanwhile, cost inflation was the slowest since January 2010 as weak demand for inputs led to reduced pricing power at suppliers,” the report stated.

The index — an indicator designed to provide a single-figure measure of the manufacturing industry’s health — dipped below the 50.0 no change mark in November, posting 48.5 from 50.1 in October. The index shows that business conditions have worsened in five of the past six months, but the latest deterioration was only slight.