Economy Watch: ECB Stands Ready to Buy Euro-Zone Debt

By Dees Stribling, Contributing Editor

On Thursday and as expected, European Central Bank president Mario Draghi said that the ECB was going to start buying short- and medium-term government debt, especially that of Italy and Spain, the weakest large links in the euro zone. In other words, the ECB will start acting more like a central bank, or at least more like the central bank of this country, which hasn’t been shy at all in buying debt in recent years.

Draghi managed to win near-unanimous support from the central bank’s board for the course of action, which places no limit on the amount of bonds that the ECB could buy (again, a lot like the Fed). For now, at least, the prospect of ECB bond-buying seemed to reassure markets worldwide that maybe the euro isn’t going crash and burn in the immediate future. Borrowing costs for Italy and Spain, which had been going down slightly in anticipation of the announcement, dropped to their lowest levels since the spring.

Wall Street was clearly paying attention to Draghi on Thursday as well, even as they waited for official jobs numbers. In any case, the U.S. equities markets jumped more than they have in some time, reaching highs unseen since before the Panic of 2008. The Dow Jones Industrial Average spiked 244.52 points, or 1.87 percent, while the S&P 500 gained 2.04 percent and the Nasdaq advanced 2.17 percent.

OECD anticipates euro-zone recession

On the other hand, it’s hardly clear what the ECB can do about Europe’s more fundamental economic problems: namely, stalled growth that’s also threatening the growth of the United States, East Asia and the rest of the world to one degree or another. Also on Thursday, the OECD said that the global economy is slowing, with key European countries entering a recession that’s now having an impact worldwide.

The OECD predicts that the euro zone’s three largest economies–Germany, France and Italy–will shrink at an annualized rate of 1 percent on average during the third quarter of this year and by 0.7 percent in the fourth. Taken individually, the German economy, long the anchor of the euro zone, is expected to contract 0.5 percent during 3Q12 and 0.8 percent in the fourth. The French contraction will be 0.4 percent in the third quarter followed by slight growth of 0.2 percent in the fourth. Italy’s significant recession will continue, with its economy shrinking by 2.9 percent and then 1.4 percent in next two quarters.

While the United States will be affected by the euro area slowdown, the OECD still expects U.S. growth to be an annualized rate of 2 percent in the third quarter and a 2.4 percent pace in the fourth—a bit better than earlier this year, but not much. “A number of downside risks threaten the outlook, including the potential for further increases to already high oil prices, excessive fiscal contraction, notably in the United States in 2013, and further declines in consumer confidence linked to persistent unemployment,” noted the organization’s chief economist, Pier Carlo Padoan, in a press statement.

U.S. adds fewer jobs than expected

The U.S. economy created a net of 96,000 jobs during August, according to the Bureau of Labor Statistics on Friday. The total was in line with the mediocre results of recent months, and in fact a bit fewer than expected.

Since the beginning of this year, employment growth has averaged 139,000 per month, compared with an average monthly gain of 153,000 in 2011. Because a fair number of people quit looking for work in August, the unemployment rate edged down to 8.1 percent for the month from 8.2 percent.

On Thursday, the government reported that initial unemployment claims were for the week ending September 1 were 365,000, a decrease of 12,000 from the previous week’s revised figure of 377,000. The less volatile four-week moving average was 371,250, an increase of 250 from the previous week’s revised average of 371,000.