ECB Is On Back Foot And For Once It's Down To Germany

• The European Central Bank is on the back foot again and this time the bad news doesn't come from Greece, Italy or any of the usual suspects in the bloc's poorer south. The club's biggest member and supposed powerhouse, Germany, has been hit by a toxic mix of weak trading with key partner China, a slump in its large manufacturing and construction sectors and even some existential questions about a business model predicated on cheap fuel from Russia.
• Trouble in Germany is hobbling growth in the eurozone as a whole and threatening to push it into a recession, rather than the "soft landing" of moderate growth and inflation that the ECB had pencilled in and the United States is still hopeful of achieving. This is forcing a change of tune at the ECB -- from ruling out a pause in its steepest and longest streak of interest rate hikes to openly talking about one as soon as next month.
• Some of Germany's present misfortunes also originate in Russia, on which Berlin had relied for a third of its energy supply until the invasion of Ukraine jeopardized those cheap imports. Others run deeper and are home-brewed, relating to their over-reliance on exports, lack of investment and shortage of labour.
• Some of Germany’s troubles can be traced back to tighter monetary policy. The central bank has consciously dampened economic activity via higher rates in an attempt to bring inflation, which at one point last year was in double digits, to its 2% target. Higher borrowing costs hurt manufacturers particularly hard because they depend on investment and no euro zone country has a larger industrial sector than Germany.
• "To loosen monetary policy because Germany is in a difficult position would be unwise but to tighten it would add macro pressure to the micro-level pressures that beset the economy," Portes added. This puts the ECB in a situation where it must contemplate wrapping up its tightening cycle before witnessing the sustained drop in core inflation it said it wanted to see.

(Source: Reuters)