ECB fears volatility in Chinese markets
Print Edition
THE volatility in Chinese markets might have more impact than expected on the eurozone’s fragile economy, while an interest rate rise in the United States might also slow its recovery, the European Central Bank said.
Economic recovery in the 19-member eurozone was moderate and gradual, a trend the ECB called “disappointing.” Real GDP remained near 2008 levels, while the US economy has rebounded significantly, it said in the minutes of its latest meeting and released yesterday.
Chief economist Peter Praet, a member of the executive board, said the ECB needs to continue communicating that it was ready to use all its instruments given the “challenging environment.”
“In particular, financial developments in China could have a larger-than-expected adverse impact, given this country’s prominent role in global trade,” the ECB said. “This risk could be compounded by negative knock-on effects from interest rate increases in the United States on growth in EMEs (emerging market economies).”
The Shanghai stock market fell by more than 20 percent in the month before the ECB’s July 15-16 meeting, and China’s growth outlook has appeared to erode further in recent days.
The Chinese currency has weakened by about 4 percent this week, and economic growth is expected to slow from 7.4 percent in 2014 to 7 percent this year, its slowest pace in a quarter of a century. Weak exports, sluggish domestic demand and a cooling property market are all weighing on the economy.
Even as China struggled and European growth remained sluggish, the US Federal Reserve was expected to raise interest rates as soon as next month. Analysts expect the Bank of England to follow suit soon after.
Assessing its 60-billion-euro-a-month (US$67 billion) asset-buying scheme, the ECB said the program is on track and the inflation outlook was consistent with its medium-term target of close to 2 percent.
Early data appear to indicate that the asset purchases are making an impact, but falling prices for commodities like oil and iron ore, along with China’s economic slowdown, have increased talk that the ECB may need to do more to get prices up.
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