London View

Euro Zone Woes; Draghi Prepared to Consider Further Measures

In the Euro zone, prospects of the economy slipping back into recession have fuelled speculation that the European Central Bank may boost stimulus measures. The Euro area’s recovery unexpectedly stalled in the second quarter as its three biggest economies failed to grow. Gross domestic product in the three months through June was unchanged from the first quarter, when it increased 0.2%, below expectations. Economic stagnation, consumer-price growth at less than a quarter of the ECB’s goal and escalating international sanctions against Russia over its support for rebels in Ukraine highlight the challenges policy makers face.

ECB President Mario Draghi committed last week to build on the unprecedented stimulus unveiled in June if the outlook deteriorates. Germany's economy contracted last quarter more than expected and France failed to grow. German GDP fell 0.2% from the first quarter, when it rose a revised 0.7%. French GDP  stagnated in the three months through June, versus market expectations of 0.1% growth.  Combined with Italy’s unexpected slide into recession, the German and French readings are likely to add pressure on the European Central Bank to expand stimulus. The Euro zone recovery is already fragile, with inflation increasing at its slowest pace since 2009, and current ECB measures will take time to have an effect.

Over in the US, we have had a damp set of weekly jobless claims with applications for jobless benefits rising by 21,000 last week to 311,000, interrupting a steady decline to pre-recession lows.