For months, the bad economic news just won't go away: the economy is cooling down worldwide, European inflation rates are falling again, German exports are collapsing. We classify the current developments here in the new interest rate commentary.
- 70 percent of the world economy slowed
- Draghi warns of economic downturn
- DRaghi succession: France's position
- Economic downturn instead of dolce vita in Italy
- How low will construction interest rates still sink?
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Economic downturn in figures: 70 percent of the global economy slowed down
At the beginning of April, the International Monetary Fund (IMF) and the World Bank met in Washington. Their conclusion: the world is economically at a delicate point, 70 percent of the world economy is slowed down. Some people are therefore asking themselves the legitimate question: How bad will the economic downturn actually be?? The answer – as always when it comes to forecasts – is not so simple.
What is clear is that all is not well with economic growth – at least temporarily. Even steadfast optimists should therefore put aside their rose-colored glasses for the time being. But: the forecasts for 2020 look far from bleak. Doom and gloom or panic attacks are therefore just as inappropriate. While long-term trends are much more uncertain than short- and medium-term predictions, many of the current factors of uncertainty, such as the trade dispute or Brexit, may have dissipated by next year. Until that time comes, however, things are likely to get uncomfortable on the financial markets once again.
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ECB meeting of 10. April: Draghi warns of economic downturn and remains on low interest rate course
The ECB Governing Council already adjusted the monetary policy outlook at its March meeting and decided that the key ECB interest rate will remain at 0 percent until at least 2020. The monetary guardians did not change this outlook in the current meeting and again emphasized the growing risks in the euro area. At the same time, they announced that the ECB still has numerous other instruments at its disposal and is also prepared to use them if necessary in the event of a prolonged economic downturn.
Many experts currently believe that the normalization of monetary policy will be even longer in coming and do not expect an interest rate move before mid-2020. Core inflation in the euro area fell back to 1 percent in March, well away from the ECB's 2 percent target mark. According to Draghi, inflation should continue to weaken in the coming months. The economic downturn could even drag on into next year. In addition, the ongoing Brexit uncertainty continues to weigh on the economy. To sum up: No one needs to buy a piggy bank at the moment, because there is no end in sight to low interest rates for quite a long time to come.
This interest rate development is problematic not only for savers and private investors, but also for banks. The deposit rate has been -0.4 percent since 2014: European banks therefore pay a penalty interest rate if they park surplus funds at the ECB. The measure is intended to fuel lending in the euro area and prevent a further economic downturn. At the current meeting, Draghi announced that the Governing Council will take a closer look at the side effects of the penalty interest rate and consider possible reliefs. However, even if, for example, allowances for penalty interest rates would relieve the burden on many private banks, this measure is likely to have little effect on the end customer.
Draghi succession: Does France support a German candidate??
In six months, the ECB presidency of Mario Draghi will end. It is still completely unclear who will be his successor. Up-to-date however something points to the fact that the chances of federal bank chief Jens Weidmann rise again. The reason: The post of EU Commission President will also be filled this year. And for that position, Emmanuel Macron recently brought in Michel Barnier, the EU's chief Brexit negotiator, and Christine Lagarde. Both are clearly more high-profile than the German candidate Manfred Weber. If it comes to a French Commission president, this could mean in return that France not only does not lay claim to the Draghi succession, but would support a German candidate for the ECB presidency quasi as a quid pro quo for Weber's renunciation. Still these are quite a lot of ifs and buts. After the European elections, the discussion is likely to gain momentum.
Economic downturn instead of dolce vita: Italy's problems intensify
The Brexit chaos has pushed Italy's problems into the background of the public debate – even though the economic situation has worsened in the meantime: Unemployment has risen, domestic demand and exports are weakening, and the OECD is even forecasting a recession year for 2019. In addition, there is the substantial national debt of more than 130 percent of GDP and the simultaneous increase in government spending by the right-wing populist government. It is highly likely that Italy will fall well short of the deficit target it has painstakingly negotiated with the EU. The negative economic data is another reason for the ECB to keep interest rates low. Italy is currently reliant on the government being able to refinance cheaply. If the economic downturn continues, European monetary watchdogs could also support Italy through further purchases of Italian bonds if necessary.
Construction interest rates still on the slide: How low will they go??
Investors are also currently unsettled and fear an economic downturn. As a result, in recent weeks they have increasingly invested in the ten-year federal bond, which is considered safe. The yield of the bond fell temporarily into negative territory in March. In colloquial terms, that means: Investors pay to be allowed to lend money to the German government. In the history of the Federal Republic of Germany this has only happened twice before. Long-term investments such as the ten-year federal bond are also used by banks to refinance construction loans. The best interest rate for ten-year mortgages is therefore also continuing to move downhill: at 0.79 percent, construction interest rates reached a new low at the end of March. Plus: It could go even further downhill. As long as political uncertainty persists, there will be no sustained upward trend in either the yield on the federal bond or in construction interest rates. On the contrary, with each negative economic news, the probability that interest rates will be pushed even further increases.