The European Central bank has its line in the sand but a tide of dismal European economic conditions may soon erode the move. ECB president Jean-Claude Trichet announced an quarter-point increase in the bank’s key rate to 4.25 percent on July 3. Trichet told reporters at the press briefing following the move that the bank acted to “prevent broadly based second-round effects to counteract the increasing upside risks to price stability over the medium term.”
It is true that inflation in the euro zone and Europe as a whole has taken a sharp, upward turn. It is also true that employment, housing, consumer and business confidence, and growth are heading south. Denmark is now the first European economy to have officially declined into recession. Italy has barely avoided one, so far. Ireland and Portugal are on the brink, and Spain is weakening.
Trichet referred to signs of “rather weak real GDP growth in the second quarter,” but attributed the slowing to strong first-quarter growth. Still, there are indications that ECB may hold at 4.25 percent level, given recessionary fears—and reality.
The numbers in the U.S. keep yelling recession, meanwhile. The unemployment held steady in June but 62,0000 non-farm jobs were lost for the sixth month in a row. Factory orders were up because of higher prices. Even the slight increase in June’s ISM Manufacturing Index was tempered by these comments from Norbert J. Ore, chair of the Institute for Supply Management’s manufacturing business survey committee: “When viewed from the manufacturer’s perspective, they are experiencing higher prices for their imputs while demand for their products is slowing,” Ore said in the survey report. The ISM Non-Manufacturing Index, which measures the golden-goose services sector, declined 3.5 points to 48.2 percent in June. The decline into recessionary territory was driven by higher energy and commodity costs.
Raising the bugaboo of speculators isn’t going to make these inflationary pressures go away. A five-year forecast by the International Energy Agency shows oil production rising only modestly through 2013. It’s the weather that hurt the U.S. corn crop, and the weather that has reduced the world rice crop. So-called speculators cannot be held responsible.