ECB rates cut will have little impact on credit, says La Francaise AM

La Francaise Asset Management provides its monthly economic outlook looking at the OECD’s latest report as well as the ECB and the Fed’s latest announcements.

The economic outlooks published by international organisations are coming out one after another and are all more or less alike. Last month it was the IMF. This month it’s the OECD, which has extended its forecasts into 2015.

The two institutions agree that the most likely scenario is that growth will be broadly maintained with very gradual catching-up by Europe. As regards the United States, the OECD projects a growth rate of 2.9% in 2014 and 3.4% in 2015. Growth in the euro area will obviously be lower but, nonetheless, it is expected to be 1.0% in 2014 and 1.6% in 2015.

Chinese growth is expected to reach 8.2% before falling back in 2015 to 7.5%, which now appears to be the magic number for Chinese growth. OECD economists do not predict a pick-up in inflation in 2014. They project consumer price inflation of 1.6% for the United States, 1.2% for the euro area, 1.9% for other developed countries and 2.4% for China.

They discount deflation as the main scenario but do not rule it out as a risk. They do not predict higher short-term interest rates before 2015, and then only in the United States where they are likely to be very modest.

What is striking about the OECD’s latest forecast, like the Monetary Fund’s projections, is the difference between the figures that portray a world economy in expansion over the next few months and the remarks that accompany these figures.

Regarding emerging countries: the presentation underscores that “the global environment may now act as an amplifier and a transmission mechanism for negative shocks from EMEs.” Further on, after recalling the reaction to discussion regarding the tapering of asset purchases by the US Federal Reserve and the “potentially catastrophic” crisis associated with the legislative ceiling on federal government debt, the authors stress that

“These events underline the prominence of negative scenarios and risks that the
recovery could again be derailed.” In short, “growth has been uneven and hesitant”.

The Fed has been sending fairly reassuring signals and is probably waiting for the budget issue to be settled before tapering its asset purchases, but it will keep a watchful eye on any signs of potential acceleration in the rate of US growth.

The European Central Bank surprised everyone by lowering its repo rate on November 7, which now stands at 0.25%. This action should be interpreted as a sign of its willingness to support the economy but the impact on credit will be very limited, as the weak demand for credit is not explained by the level of the rates but rather by the uncertainty surrounding the economic outlook.

The necessity of recharging the interbank market may push the ECB to take new initiatives. We are maintaining a cautious scenario for 2014 and expect the world economic growth rate to stabilize at its current level. Given the backsliding that occurred during the first half of 2013, we expect the 2014 growth rate to be on average higher than it that in 2013, but this is already known. In fact, we do not expect a pick-up in economic growth over the next few quarters.

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