The Overall Picture Following ECB’s Measures

The ECB pulled out its bigger monetary policy guns, following the European debt crisis in 2010, eager to boost growth, inflation, lending and consumption. Following the recession the euro area faced in 2012, the changes to the monetary policy pushed the economy back to positive growth. The recovery in the euro area continued in the last quarter of 2015 by 1.6 percent year-over-year, although growth remained soft overall and below the pre-crisis level. Taking into account the waves of stimulus from the central bank and the plunge in oil prices, the pace of recovery is considered to be very slow.

However, the drop in the oil prices boosted consumer spending which is the main engine of recovery. Consumer spending had been the main contributor to growth in the previous eleven months. Consumer spending is on an upward trend since 2013 and is now near its all-time highs. Quantitative easing and the last attempt of the bank – the introduction of the negative interest rates in June 2014 – depreciated the euro and kept it at low levels against most of the major currencies. The euro’s depreciation helped to increase exports, pushing the current government’s account to surplus at 3.7 percent in 2015.

The household debt to income ratio in the euro area decreased for a fourth consecutive year, falling from 98.66 percent of gross income in 2010 to 95.66 percent in 2014, reaching the pre-crisis levels. The household’s debt reached its highest level in 2010 driven mainly by falling house prices as many households saw their wealth shrink relative to their debt and with less income and increased unemployment, found it harder to meet their mortgage payments. The ECB has held its interest rates near zero over the last few years in an attempt to foster faster economic growth.

By maintaining low interest rates, the ECB helped the households to reduce their debt and gave them more freedom to spend more freely. With Household debt falling for a fourth consecutive year, there is more evidence of improving household finances that should lend support to consumer spending and the economy itself, which in turn can lead to a virtuous cycle of more business investment and hopefully more jobs. As proof of the above, the unemployment rate started to decline steadily (currently at 10.3 percent) from its 2013 peak at 12.1 percent, while wages were rising at a moderate and steady pace, around 1.5

Euro, ECB, Eurozone, Past and Upcoming, Challenges, Macroeconomics, fx trader, forex EZ Growth and UnemploymentFig.3. Euro Area Economic Growth and Unemployment Rate

Plunging Oil Prices Sends Inflation to the Lowest Level on Record

Since mid-2013, euro area’s inflation has been dangerously low as it moved away from the ECB’s price stability target, quantified in a rate close to, but below, 2.0 percent. Meanwhile, sluggish economic growth weighed on prices and pushed the euro area into deflation for the first time since 2009. But the main reason that inflation has been low the last few years was because of the falling oil prices and weaker labour market conditions. Inflation has now been far below 2 percent for almost three years and the ECB has been using increasingly aggressive monetary policy measures to get inflation back to normal levels. These monetary policy measures have failed to strike an appropriate balance at consumer prices and we would expect inflation to remain low as long as oil prices remain low. The ECB itself is now predicting inflation in the euro area will be just 0.1 percent this year, 1.3 percent in 2017 and 1.6 percent in 2018.

Euro, ECB, Eurozone, Past and Upcoming, Challenges, Macroeconomics, fx trader, forex westFig.4. Oil Prices Nov. 2013 - Apr. 2016, Source: JFD Brokers

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