Following our last ECB article on December 6, below there is an update on tomorrow’s ECB policy meeting.
The expectations that the ECB intends to phase out QE in December, has been part of the central guidance for a while now. However, up to now, ECB President Draghi remained cautious and kept the door to an extension ajar, amid volatility on financial markets and amid signs that global trade tensions are having a bigger impact on the Eurozone’s growth outlook than previously expected.
Indeed, from the economic data perspective, Trump’s tariff threat seems to hang over European economy, and more precisely over the European car producers, even if industry leaders appeared cautiously optimistic after a recent meeting at the White House. Tariffs have been put on hold for now, but of course the threat can be revived any time and remains a ticking time bomb adding to concerns in the sector.
However, the automobile industry is not the only one struggling and expectations among machinery producers have also turned negative, while the expectations reading in the intermediate goods sector was at 0.0 in November, compared to 22.1 in November last year. All in all, the manufacturing sector is clearly preparing for stagnation.
Services sector sentiment, meanwhile, is stabilising at high levels with orders levels still at record highs, according to the Ifo survey. Marketing and real estate services are doing well and maybe not surprisingly also legal, accounting and audit related consultancies seem to be booming amid Brexit uncertainty and protectionist measures.
Wholesale trade is showing some weakness, while the retail sector is still benefiting from improving labour markets and rising disposable income. Consumer confidence has pulled back from cycle highs, but remains very strong, as official jobless numbers are at record lows.
overall in Europe, we can see a picture of a recovery that has reached its limits and is petering out. Orders levels remain robust and GDP is still expected to rebound in the last quarter of the year, but current survey readings suggest a relatively modest growth rate of just around 0.3% q/q for the fourth quarter, with economic activity stagnating at high levels against a background of rising inflation.
In Germany on the other hand, the unexpected economic contraction in Q3 was largely put down to special factors with a quick rebound promised in the fourth quarter. Recent data releases though suggest only sluggish growth in the Q4, with many sectors stagnating albeit at relatively high levels. At the same time, inflation and cost pressures are on the rise, and that against a background of considerable uncertainty about the global outlook.
Hence, even if the uncertainty remains extremely high and clearly a resolution of global trade tensions and an amicable Brexit could turn things around, the room for a further expansion in Germany and in Europe in general are limited, as there is very little spare capacity.
ECB: December 13
Therefore,on tomorrow’s ECB rate decision and Press Conference, there is nothing that should prevent ECB from ending net asset purchases as planned in December. Significantly, Bundesbank President Weidmann is one of those arguing that the central bank should scale back support sooner rather than later.
The German slowdown may be in the headlines, but there is higher risk that if the German recovery stalls, before countries such as Italy have managed to even catch up with pre-crisis levels, Eurozone countries will drift even further apart.
At the same time, Pres. Draghi and ECB’s Praet in particular still argue that the economy still needs substantial monetary support. This will be provided on the one hand by the fact that QE now looks set to be part of ECB’s regular monetary policy toolkit. Furthermore, the ECB guidance on rates is likely to remain that hikes are off the agenda through the summer of next year, despite the statements from some ECB members, who want to talk about hikes earlier, such as ECB’s Knot.
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Andria Pichidi
Market Analyst
HotForex
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