ECB Follows China’s Lead Creates New Stimulus

In a surprise move, the European Central Bank announced a new stimulus package at its policy meeting on Thursday. The ECB announced no changes to the rates and it signaled that it will hold interest rates where they are for the rest of 2019.

This is almost a complete reversal from what the bank’s stated policy was just three months ago. The central bank announced in December that it was ending a $2.9 trillion bond-buying program meant to provide stimulus to the EU’s economy. The ECB also announced at that time that they would hold rates where they were through the summer of 2019.

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The new stimulus package is designed around cheap loans for banks. The loans have a maturity of two years and will be launched in September. It is a new way of pumping cheap money into the economy in the hopes that banks will lend more to corporations looking to take advantage of the cheap money.

The ECB has been cautious about the economy for several months with President Mario Draghi stating on several occasions that risks are prevalent, but that the likelihood of a recession is low. The new stimulus package passed with a unanimous vote, and Draghi stated, “Given the complexity of the package, I think this is a very positive sign.”

The move by the ECB comes just days after China announced its intention to provide additional stimulus to its economy through different fiscal policies. Premier Li Keqiang addressed the National Party Congress in Beijing on Tuesday and delivered the country’s government work report. Li stated, “We must be fully prepared for a tough struggle.”

The new stimulus measures include lower tax rates for corporations and lower pension payments as well. Another proposed move that was certainly welcomed by foreign corporations is offering foreign entities the same rights as Chinese entities when doing business in China.

While these moves by the ECB and China should be welcoming to investors, they also show the concern from the two parties about economic slowdowns in the two areas. If everything was going well, there wouldn’t be any need for stimulus packages.

President Draghi may not see a high probability of recession, but I think he is kidding himself to some degree. I think the moves they are making show there is real concern that the European economy is in danger of going into a recession. You don’t make surprise moves unless you are extremely concerned. Especially only three months after ending another stimulus package.

Obviously, the exit of Britain from the union is weighing on the economy and the slowdown in China is yet another factor. There is also the matter of the trade war between the U.S. and China. There is a possibility that the focus of President Trump’s trade crusade will shift to Europe after an agreement is reached with China. There have already been some comments exchanged with a focus on European auto imports to the U.S.

Between the ECB, the Federal Reserve, and changes in fiscal policy by the Chinese government, we have seen a major shift to more dovish postures in the three largest economic areas of the world. There is an obvious concern that the global economy is headed toward a recession or at the very least an extended period of very slow growth.

Domestically, I wonder what impact these moves will have on President Trump’s policy goals. If he can work out a deal with China in the near future, will he declare victory and back off on Europe? Or will he try to take advantage of the weaker European economy and try to negotiate a deal on that front? With Europe’s economy already weakening, the last thing they want is to have tariffs slapped on cars being exported to the U.S. That would most certainly slow auto production and could be the blow that tips Europe into recession.

Unfortunately –  and I have expressed this before – if Europe slips into a recession and China sees its economy continue to slow, I don’t think the U.S. can maintain economic growth either. While our economy may be one of the strongest ones right now, if Europe and China see their economies slow further, we will more than likely slip into a recession as well.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

One comment

  1. In just a week, we have gone from sunny weather and rosy forecasts to doom and gloom again, like we experienced at the end of last year. And stocks swoon.

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