Draghi QE2 signal flags potential trouble

Does ECB accept China will weigh on the global economy for some time to come?

The European Central Bank seems to be gearing up for another round of quantitative easing. Fully a year before the present scheme is due to unwind, ECB president Mario Draghi (pictured) has raised the prospect of an increase in the “size, composition and duration” of the programme.

This seems significant. Given the brouhaha surrounding the ECB’s belated and reluctant decision to initiate the bond- buying campaign, Draghi might well have been expected to kick for touch on the QE2 question. That would be in keeping with the ECB’s cautious style. Instead, he incorporated the declaration into his prepared remarks at a press conference.

One interpretation is that the signalling impact of the very suggestion would improve the prospects of success in the current effort, which has so far failed to inject serious momentum into the euro- zone economy as it slowly recovers. Indeed, Draghi’s remarks cheered markets, initially at least, and helped bring the euro down.

Another interpretation, however, is that the ECB accepts that blowback from ructions in China will weigh on the global economy for some time to come. This will have implications not only for Europe’s tentative turnaround, but also for the US and British economies which have helped to pull Ireland from the mire.

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True, it’s in the way of these things that Chinese contamination would take a while to ripple out. But Draghi’s explicit signal points to a clear potential for trouble down the line. If this risk was but a chimera, he would have steered in another direction. He might also have kept his language vague, a particular specialism of the Frankfurt crowd.

Quite what this means for us is not yet clear. All the evidence suggests the domestic economy is motoring ahead at a fine clip. Still, any real downside from the Chinese factor might not materialise for months. This is a new phenomenon, however. At the very least, it suggests the stellar figures seen this year and last are unlikely to improve further.

The question remains as to whether the Government goes to the country in November or waits until February. All of this will feature in the eventual decision.