Party Schtick

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What's going on?

The eurozone economy shrank at the fastest pace on record last quarter – and the central bank didn’t exactly seem to blow investors away with its tricks to help fix things.

What does this mean?

Data out late last week revealed that the eurozone economy was almost 4% smaller in the first quarter of 2020 than in the fourth quarter of last year – and when annualized, shrank more than 14%. The dramatic drop probably doesn’t need much explanation: the coronavirus pandemic shut down an economy that was already barely growing.

Investors looking for good news didn’t find much in the European Central Bank’s response, either. The ECB increased its super-cheap loans to the region’s banks in hopes of encouraging them to lend more, sure, but it didn’t try boosting the economy by lowering interest rates as some investors had wanted. Nor has it increased its own form of quantitative easing, at least for now. In fact, the bank admitted it’s expecting the eurozone to shrink 12% in 2020 overall.

Why should I care?

For markets: All about that dollar.

Different data last week showed the US economy shrank for the first time in six years last quarter. But even so, the country’s 4.8% annualized decline was much smaller than Europe’s, and the rise in new unemployment is slowing down. Investors, then, might start moving their cash back into the country, in turn pushing up the dollar’s value versus other currencies.

The bigger picture: Doctor, heal thyself.

The ECB’s limited action has put pressure on individual eurozone countries to stimulate their own economies. For countries like Germany – which, prior to coronavirus, earned more from taxes than it spent each year – that’s relatively easy. But for countries with already mountainous debts like Spain and Italy, it’s much harder. Investors, then, sold off their bonds late last week, potentially worried they’d increase their debts and become unable to repay them.

Originally posted as part of the Finimize daily email.

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