ECB: more cuts ahead?

As expected, the European Central Bank (ECB) cut rates by 50 basis points to 1.50% last week. In the final speech, Mr. Trichet designed a cloudy picture for the Euro zone economy and anticipated more cuts ahead. In fact, ECB expects growth to be on the range of -0.7% to +0.7% in 2010 from -0.5% to +1.5% previously estimated and revised growth for this year from -2.2% to -3.2%. In the fourth quarter of 2008, the Gross Domestic Product (GDP) for the European continent was firm at -1.5% quarter on quarter, while the annual rate was revised to -1.3% from -1.2% previously reported. Exports fell 7.3% and imports slid 5.5%. In Italy alone, GDP is expected to decline below -2.0% this year compared to last year prediction for + 0.4%.

The economic contraction covers all major European countries with Germany experiencing one of the worst recession since World War 2. There are more than 3 million people out of work and consumer spending is shrinking by the minute. Consequently, retail sales fell 0.6% in January from December’s rise of 0.5%. Annually, German sales declined 1.3% after increasing 0.4% in December. The Purchasing Manager’s index (PMI) for the Euro zone service sector slumped to an historical low of 39.2 in February from 42.2 in January. All major European economies registered a loss. The PMI index for Germany declined to 41.3 from 45.2. French PMI slid to 40.2 from 42.6 and Italian PMI moved down to 37.9 from 41.1. More weakness is expected shortly. In France, the ILO unemployment rate printed 8.2% in fourth quarter from 7.6% in the third quarter.