The ECB will not start the normalization of its monetary policy in 2019. The interest rate level will remain stable, my bet is that the refi rate and the deposit rate will remain at the current level in 2019.
The lack of external impulse, the slower momentum in the manufacturing sector and the convergence of the headline inflation rate to the core inflation rate are three reasons that suggest that the ECB will not take risks in the management of its monetary policy. The monetary policy normalization, even the expectation of it, may weaken economic activity. Therefore it’s not the good policy when the inflation rate is way below the ECB target with no convergence to the target in a foreseeable future.
The framework I have in mind is the following: Due to more heterogeneous behaviors and uncertainty at the political level, global growth will become, in 2019, weaker than in 2017 and in 2018. Inside the Euro Area, there are no coordinated policies that may boost growth, therefore growth trajectories will converge to potential growth. This framework is not a source of monetary policy normalization. But we can add that the dramatic oil price drop in recent weeks (due to excess supply in the US and in Arabia) will push the headline inflation rate to the core inflation rate which has been close to 1% for months. It’s still way below the ECB target and therefore not a source of monetary policy normalization. Continue reading
The economic prospects in the Euro Area are clearly on the upside in September. The synthetic index which is a weighted average of the manufacturing and services indices is at its highest since April 2011. This suggests a rapid growth figure for the second part of 2017.
The manufacturing index is at its highest since February 2011 and the index for services is close to top levels seen at he beginning of the year.
Growth and employment are on the upside. It’s time for the Euro Area to create conditions for a long term sustained growth strategy with structural reforms locally and for the European institutions
The graph compares the composite indices for the 4 major countries of the Euro Area plus the United Kingdom
The French economic momentum is now close and in phase with what is seen in Germany pushing the Euro Area dynamics on the upside. Spain remains a major contributor. It’s hard for Italy to follow the other 3 notably in the service sector.
The question of Spain is important: it has been a major contributor to the EA growth since 2014 but internal troubles after the referendum in Catalonia could create a less homogeneous trend in Spain and could damage the EA prospects. For the moment the uncertainty remains high.
The United Kingdom does not take advantage of the contagion that may come from the Euro Area. We see that since mid-2017 there is a divergence between the Euro Area and the UK. That’s Brexit uncertainty.
The world trade rebound will continue in the forthcoming months. That’s what the graph between world trade growth and the Markit index suggests. The robust level of the manufacturing index is consistent with a stronger momentum on world trade.
Every region of the world shows an improvement in the manufacturing activity according to Markit. This will support a balanced growth scheme at the world level.A higher Markit index will boost trade and therefore world growth.
The momentum at the world level is strong and robust. The Euro Area is in a catchup period with a high momentum on new orders and on employment. The business cycle is virtuous. There are reasons to be optimistic on the Eurozone environment.
The situation is more specific in the US after hurricanes. The most important contributor to the ISM increase is the item on delivery. There were strong needs and it was difficult to deliver due to disruption and delays.
The situation is robust in Japan and the Brits are still optimistic on their activity.
Indices for emerging countries are robust. The situation is good for emerging countries: growth in developed countries + higher commodity prices + growth in China is steady + good financial conditions (the impact of Fed’s hikes on interest rates have been very limited)
The marginal slowdown is associated with a marginally lower index in China.
Synthetic indices on economic activity stabilized in August according to the Markit Survey that was out this morning. These figures are consistent with a 0.5/0.6% GDP growth for the third quarter (non annualized figures).
The employment momentum is still robust but doesn’t accelerate anymore. But the business cycle is still virtuous with a strong momentum in the manufacturing sector. The survey price index stabilized in August. The ECB can maintain its accommodative bias on its monetary policy. The more expansive euro has not yet influenced companies’ behavior.
Strong growth during the second quarter
GDP growth was marginally stronger during the second quarter in the Euro Area. It was at 0.56% (2.26% at annual rate) after 0.51% (2.04% AR) during the first three months of this year. The growth profile has been slightly modified with this publication. Formerly, GDP growth for the first quarter was at 0.58%.
Carry over growth for 2017 at the end of the second quarter is 1.7%, close to 2016 average growth. We see on the graph that during the last three quarters growth is stable and close to 2% (at annual rate).
When we look at corporates’ surveys (see below), we can infer that GDP growth could be close to 0.5% (2% at annual rate) during the last two quarters of 2017. In that case the average growth for 2017 could be at 2.1%. Continue reading
The Eurozone synthetic index of the Markit survey for February 2017 is skyrocketing. Its level is the highest since April 2011. For France and Germany profiles are similar. The French index is back to its May 2011 level and for Germany the comparison is for June 2011.
Therefore the GDP growth for the first quarter may be stronger than expected and for 2017 the figure should be stronger than what is currently forecasted (see here).
Economic policy stances are more stable and more readable since 2014/2015. Fiscal policies are more neutral and the ECB strategy is accommodative and perceived as such for an extended period. As a consequence, companies and households’ behaviors depend more on their own constraints than on hazardous measures taken by governments as it was the case until 2012/2013. Moreover interest rates are very low, financial conditions very accommodative and the oil price is stable at a low level.
There is a need now to continue and the ECB will maintain its current strategy. This will help to amplify the current growth improvement.
The Euro Area index profile suggests that all the other countries (outside France and Germany) are also performing well (We don’t have early estimates for other EA countries). This means that the current impulse will lead to to stronger and more dense trade between EA countries creating the conditions for a more virtuous business cycle. It will be more autonomous and will create more jobs therefore reinforcing the internal demand momentum.
The main risk is on the political side.