The growth rate in Germany will be approximately 2%

Dr. Jens Kramer, Economist at NORD L/B, on Eurozone’s inflation rate and economic outlook

Currently there are some concerns that the ECB President risks making the same mistake as the Bank of Japan in 1998, by publicly playing down a deflation threat. Do you personally think that Europe might follow the case of Japan and end up in deflationary territory?

No, I do not think so. The inflation rate is obviously very low at the moment and much weaker than the ECB is heading for, with Eurozone CPI falling to 0.5%, according to the data published yesterday. However, there are several influences, which have a distorting effect on the inflation rate. For instance, calendar Easter holidays, which were in March last year, this year will be in April. Thus, the seasonal patterns are different. That has an effect as well as a fall down in energy prices and downturn in food prices increase. Thus, there are several factors, which contribute to the low inflation rate.

According to our point view, there is no deflation threat at all. The opposite is true. We see economic cycle being on the way up in the Eurozone; especially, in Germany we will see a stronger wage growth. In our view, there are no signs that the Euro bloc’s economy is moving in the deflationary direction.

What are the odds that the ECB might introduce any measures like QE or negative deposit rate on April 3?

There is a potential that central bankers will take actions. As Mr. Draghi and other policy-makers may think that they have to present the market something, perhaps sterilization of the SMP programme might be abandoned. However, I do not think they will adjust interest rates. The market would get even more nervous about deflation, if they would do something. If officials just go ahead and explain that they do not see deflationary risks, that would be the right way to proceed.

How appropriate to your mind is the monetary policy of the ECB given the current economic situation in the region?

I believe it is appropriate. Everything that the ECB wanted to achieve - could be achieved with the exception of the monetary aggregate development and especially loans. It is still difficult for some countries to get the economy powered by an appropriate loan development, which is not true for Germany. However, other than that, the economic situation has enhanced and the capitalization of many banks has improved. Thus, to my mind the ECB’s monetary policy has proved to be successful.

What is your economic outlook for the Eurozone? What kind of economic developments do you see a year from now?

We expect the Eurozone’s GDP growth of about 1% this year and it should be improving next year. The growth rate in Germany will be approximately 2%. Also, the situation in countries, which had many difficulties with their economic conditions, has improved substantially, especially in Italy and Spain.

To sum up, the growth potential in Germany is obviously higher, while developments in those countries, which have been in a deep recession for a very long time, are now also much better.