Eurozone in big trouble – rate cuts on the cards?

Some pretty horrendous looking data came out of the Eurozone this morning.  While the GDP and unemployment numbers were in line with expectations (Q3 GDP was confirmed at -0.2% and unemployment rose to a two year high of 7.8%), the business and consumer confidence numbers were horrific.  Economic confidence fell to a record low and consumer confidence was the lowest since records began in 1985.  Exports from Germany tumbled 10.6% in November, which was also the biggest drop since Germany was reunified in 1990.  This data comes on top of yesterday’s economic data release showing that European producer prices in November fell the most since 1981, suggesting a severe risk of Eurozone inflation undershooting the ECB’s 2% target in the coming months. 

The ECB suggested last month that it was going to adopt a ‘wait and see’ tactic, hinting that Eurozone interest rates would remain on hold at 2.5%.  But data this week suggests that things are deteriorating faster than the ECB thought a month ago, and interest rates will have to fall further.  Eurozone rates should be cut on Thursday next week, and rates should be cut further thereafter.