Benzinga - by Piero Cingari, Benzinga Staff Writer.
The President of the European Central Bank (ECB) Christine Lagarde has expressed skepticism regarding the idea that two consecutive quarters of negative growth could signify the onset of a recession for the European economy, challenging the conventional economic definition.
Addressing questions following the ECB’s decision to keep interest rates unchanged for the third consecutive meeting, Lagarde attempted to quell market pressures about the start of interest rate cuts in Europe.
“The euro area economy likely experienced stagnation in the last quarter of 2023,” Lagarde stated in her opening remarks on Thursday, emphasizing that short-term data continues to indicate economic fragility.
The European economy currently finds itself in a significantly different situation compared to the American economy. Negative growth was already recorded in the third quarter of the year, and any further negative readings in the fourth quarter would indeed signal the beginning of a recession.
This situation stands in stark contrast to recent developments in the U.S. economy. In the third quarter, it boasted an annualized growth rate of 4.9%, followed by a 3% annualized growth in the last quarter, surpassing economists’ most optimistic expectations.
“Rate Cuts Are Premature”, Lagarde Says, But Markets Don’t Buy Despite hints at the World Economic Forum in Davos regarding potential interest rate cuts in the summer, Lagarde clarified that such discussions are currently premature.
"We need to be further along in the disinflation process," Lagarde said, adding that the ECB must have sufficient confidence that inflation will reach the target within a reasonable timeframe before discussing rate cuts.
This stance appeared to many market participants as a classic poker bluff.
In fact, traders are currently factoring in a 50 basis point reduction in rates by June 2024, and a cumulative 150 basis points reduction by December, suggesting an even more aggressive rate cut trajectory compared to the Federal Reserve.
The euro-dollar exchange rate fell 0.5% to 1.0850. The Invesco CurrencyShares Euro Currency Trust (NYSE:FXE) fell 0.4%, while the iShares Europe ETF (NYSE:IEV) closed 0.4% higher.
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Drawing Parallels With Yellen In 2022 While the latest survey data for the Euro Area continues to confirm a contraction in private sector activity, Lagarde sought to downplay the risk of a recession, redirecting the focus elsewhere.
“The labor market remains robust. The unemployment rate, at 6.4% in November, has fallen to its lowest level since the inception of the euro, and more individuals have joined the labor force,” stated the ECB chief.
Lagarde recalled a conversation with her colleague and friend, U.S. Treasury Secretary Janet Yellen, when the U.S. experienced two consecutive negative quarters in Q2 2022. Lagarde argued that this should have been seen as a sign of a recession.
Yellen’s response was clear: “With those employment numbers, forget it, we are not in a recession.”
Lagarde emphasized the importance of the ECB remaining vigilant and responsive to a wide range of data and signals.
The ECB has bought some time for now, but with the Q4 GDP data release scheduled for Jan. 30, markets will soon find out whether other policymakers in Frankfurt will reject the idea of a recession if it is confirmed by the data.
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