Stormy economic horizon may give ECB reason to pause

With threats to the global economy on the rise analysts expect European Central Bank chief Mario Draghi will temper expectations of a quick exit from easy money policies
AFP

Frankfurt am Main (AFP) – With clouds gathering over the outlook for economic growth and inflation limping, European Central Bank President Mario Draghi will likely temper expectations Thursday for a quick exit from its massive stimulus programme for the eurozone, analysts say.

Governors are expected to keep interest rates at their historic lows and hew to a September expiry date for their 30-billion-euro ($37 billion) per month “quantitative easing” (QE) bond-buying scheme.

Caution from Frankfurt is even more likely as policymakers dropped a promise that they could increase QE if the economy weakened again at their last meeting in early March, saying they had been encouraged by positive data.

“Draghi will have to strike a balance between recognising that economic data suggest the beginning of a slowdown, while saying (the ECB’s) March scenario of greater confidence it can bring inflation back towards its objective remains intact,” said Bank of America Merrill Lynch economist Gilles Moec.

Since late last year, the euro has strengthened against the dollar as the economy gathers pace and financial markets anticipate future interest rate rises, potentially slowing growth and inflation in the eurozone.

The ECB’s central price stability objective is inflation of just below 2.0 percent.

But price growth stood at 1.3 percent in March, and central bank forecasts call for it to reach just 1.7 percent by 2020.

Meanwhile, President Donald Trump’s strident “America First” policy has shaken companies and markets worldwide in recent weeks, as he vowed to slap tariffs on metals imports.

While the eurozone secured a temporary reprieve, a tit-for-tat escalation with China would have effects that spill over to other countries and undermine global trade. 

French President Emmanuel Macron and German Chancellor Angela Merkel hope their successive White House visits this week can fend off the danger.

And there are signs a hoped-for grand bargain between Paris and Berlin on eurozone reform, which observers hoped would buttress the currency area after years of crisis, may not be reached quickly.

Despite the shades of gloom, the ECB “must continue to hint at an announcement (of further policy changes) in June or July, to continue anchoring expectations of a normalisation” away from QE, said analyst Louis Harreau of Credit Agricole.

– Hints of slowdown –

Lower interest rates and QE are designed to pump cash through the financial system and into lending to firms and households — powering economic growth and inflation.

But after a near-euphoric second half of 2017 lifted annual growth to its highest level since 2007 — an expansion of 2.3 percent across the eurozone’s 19 nations — there are hints fewer positive surprises may be in store this year.

A key survey of eurozone business activity, the purchasing managers’ index, was unchanged in April at 55.2, data company IHS Markit said Monday.

The index has joined other indicators in losing some of the exuberance seen around the turn of the year, although the reading was above the 50-point mark that suggests economic expansion.

“The economy has shifted down a gear at the start of this year,” Commerzbank analyst Christoph Weil commented, but “there is no need to fear a massive plunge in economic growth”.

Both the ECB and the Washington-based International Monetary Fund have lifted their growth predictions for the eurozone to 2.4 percent in 2018.

As the central bank approaches technical limits to its bond-buying, it has little choice but to hope such forecasts come true as it tiptoes on a path out of QE defined by Draghi’s favourite adjectives: “confidence, patience, persistence and prudence”.

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