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Global Economy Slows, Pushing Europe’s Central Bank to Make a Surprise Move
By Jack Ewing
FRANKFURT — The European Central Bank signaled deep concern about the state of the region’s economy Thursday when it unexpectedly reversed course and revived stimulus measures originally designed for times of crisis.
The move by the normally cautious bank to try to forestall recession showed how much trade tensions have reverberated through a slowing world economy while clouding the outlook for growth. The decision, coming amid a slowdown in China, also revealed how difficult it has been for much of the world’s central banks to return policy to normal a decade after the beginning of the global financial crisis.
The unanimous vote by the central bank’s Governing Council to start adding a stimulus measure intended to encourage lending, when it had only recently been taking it away, comes a little more than a month after the Federal Reserve suspended its plans to raise interest rates in the United States.
Mario Draghi, the president of the European Central Bank, implicitly blamed White House policies for the decision to restart a program designed to encourage lending by commercial banks and prevent a credit crunch.
“Lower confidence produced by the trade discussions” was a key cause of economic slowdowns in Europe, China and emerging markets, Mr. Draghi said at a news briefing. He added, though, that he does not expect a recession.
The bank also pushed back the date of its earliest possible increase in benchmark interest rates, saying there would be no change until 2020. That means that Mr. Draghi will serve his full nine-year term without ever having overseen a rate increase. He leaves office at the end of October.
“The weakening in economic data points to a sizable moderation in the pace of the economic expansion that will extend into the current year,” Mr. Draghi said in a prepared statement before a news briefing on Thursday.
Most analysts thought the central bank would wait for more economic data before making a move. But the bank’s in-house economists significantly lowered their forecasts for growth and inflation, prompting the bank to act sooner.
In estimates published Thursday, the central bank economists said that growth in 2019 would be 1.1 percent, compared to a previous forecast of 1.7 percent.
“This certainly goes further than most of us thought that the E.C.B. would,” Paul Diggle, senior economist at Aberdeen Standard Investments, said in an email. “It is about as far as the E.C.B. will go toward admitting that the European economy faces some serious headwinds in the months ahead.”
The central bank has been slowly winding down the measures it used to prevent collapse of the eurozone following the 2008 financial crisis. But on Thursday it reinstated one of them, a program that will allow commercial banks to borrow money from the central bank at zero interest, provided they lend the money to businesses or consumers.
The measure is designed to help banks in countries with weaker economies like Italy, which may have trouble raising money on capital markets at reasonable rates, creating a credit crunch.
The bank had previously said it would not raise its benchmark rate, which is zero, until September at the earliest.
The announcement provided a jolt to European stock markets. The major indexes, which had been lower for the day, briefly jumped into positive territory. But any euphoria about central bank stimulus may have been outweighed by the realization that the central bank is more worried about the economy than investors thought. Stocks slumped in Europe and, later in the day, on Wall Street.
“Today’s announcements have some flavor of panic,” said Carsten Brzeski, chief economist at ING Germany.
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