What Did The European Central Bank Tell Us?

On today’s show we are looking at the economy and trying to figure out if the global economy is growing or shrinking, and by extension how the economy will be affected in North America.

Thursday this week the ECB announced  another 0.25% rate cut while at the same time signalling that they are nearing the end of their rate cutting. 

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Episode Transcript

(00:01):
Welcome to the Real Estate Espresso podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. Right now, the public spat
between Elon Musk and President Trump is catching headlines.
It's sensational and it makes for great television.
It's reality TV at its best. Those real estate investors, we
frankly don't care about that. We're concerned with economic

(00:22):
growth and contraction. We're concerned with real costs
and the cost of capital. When the economy is growing and
employment strong, then residents pay their rent.
When the economy is shrinking and layoffs are rampant, then
delinquencies rise and landlordsexperience economic stress.
On today's show, we're looking at the economy, trying to figure
out if the global economy is growing or shrinking, and by
extension how the economy will be affected.

(00:44):
In North America Thursday this week, the European Central Bank
announced another quarter point rate cut while at the same time
signaling that they're nearing the end of their rate cutting.
So why is the European Central Bank cutting rates?
Conventional wisdom is that you raise rates to fight inflation
and you lower rates to stimulatethe economy and encourage more
hiring. European Central Bank Christine

(01:05):
Lagarde stated in Thursday's press conference.
Inflation in May declined to 1.9% from 2.1% in April.
She sees inflation holding at orbelow the mid range target of
2%. Inflation is forecast average 2%
in 2020, five 1.6% in 2026, and 2% in 2027.
Christine Lagarde talked about their forecast for economic

(01:28):
growth of 0.9% this year, 1.1% next year, and 1.3% in 2027.
These are very anemic numbers. Trade uncertainty is expected to
weigh heavily on international trade in the short term, but the
increases in defense spending are expected to provide
sustained economic growth over the next few years.

(01:48):
In her remarks, she mentioned that the first quarter was
surprisingly strong. This was a flurry of activity to
pull orders ahead of the announced April 2nd tariff
deadline. The expectation is the strength
in Q1 will be offset by corresponding weakness in the
remainder of the year. The German government has been
clear that they're expecting 0 growth this year and next year.
And Germany is the economic engine of Europe, accounting for

(02:09):
1/4 of the entire EU economic output.
So let's break this down. Europe has been relying on the
US for disproportionate level ofprotection.
Europe spent 1.9% of GDP on defense in 2024.
It's expected to rise this year and next year.
Now, historically, the NATO target for defense spending has
been 2% of GDP, and that guideline was agreed upon by the

(02:31):
NATO heads back in 2014 in response to Russia's annexation
of Crimea and broader instability.
It built on an earlier commitment from 2006.
There's been a significant push recently, particularly from the
US, to increase this target to 5% of GDP.
That new higher target is currently being discussed and
negotiated amongst the NATO allies with their summit in The

(02:53):
Hague later this month. While the 2% target remains the
official agreed upon benchmark, the conversation has shifted
towards a higher number with a proposed split of 3 1/2% of GDP
for hard military spending and 11/2% of GDP for broader defense
related items like military mobility and cybersecurity.
The timeline for reaching that new 5% target is definitely a

(03:13):
point of negotiation. So it begs the question, if
governments increased defense spending and the private sector
is not growing and government isprinting money to spend those
extra dollars or EUR, did the economy really grow?
The economy can grow in nominal terms, that's for sure.
What is the result of adding allthose extra dollars or EUR spent

(03:34):
in the economy if it gives you an increased nominal GDP, but
then you're really just inflating the currency.
If inflation exists, we need to subtract the rate of inflation
in order to get the real GDP. The other thing that's
happening, of course, is the position of the US and global
trade. the US dollar is still the world reserve currency.
However, Christine Lagarde spokeabout 10 days ago in Germany
about the role of the euro and its strategy to gain market

(03:56):
share against the US dollar in international trade.
Today, the US dollar has a 58% market share for international
transactions. The euro share of the market has
been rising steadily over the last decade, and today
represents a 20% share of international transactions.
So for example, if, let's say, Japan wants to buy furniture
from IKEA in Sweden, it's unlikely that Sweden wants

(04:17):
Japanese yen, and it's unlikely that Japan wants to go out and
buy Swedish kroner. Most of these transactions end
up being denominated in a currency that's mutually
agreeable. Most often that's the US dollar.
The transaction gets priced in U.S. dollars, and the flow of
cash happens in dollars, but increasing these these
transactions are happening in euros.
Now that we have a massive difference between interest

(04:38):
rates in Europe and the US, which one of these is going to
be more attractive for international trade?
If you're sitting on dollar reserves, you'll get a higher
rate of interest parking the extra cash in U.S.
Treasuries, but then you'll alsopay less if you're looking to
borrow EUR for a transaction. There's real economic weakness
in the European Union and the US, and I don't believe the Fed
will lower rates until they're hit in the face with massive

(05:00):
layoffs. This week's anemic employment
report from ADP is not going to be enough.
The layoff announcement this week of 7000 jobs being cut at
Procter and Gamble? That's not enough either.
At a certain point, we'll see the Fed react and the gap
between interest rates in Europeand the US is going to close.
For now, the political discourseis dominating the economic
discourse, so prepare for another several months of

(05:22):
uncertainty as you think about that.
Have an awesome rest of your day.
Go make some great things happenand we'll talk to you again
tomorrow.