- 2018-09-28
Eurozone faces more downward pressure
Most analysts believe that economic growth in the euro zone has slowed due to factors such as the appreciation of the euro, and the Sino-US trade dispute will make it worse.
But this will not prevent the European Central Bank from ending its asset purchase program this year and raising interest rates in 2019, even if inflation is expected to be far below the central bank's target until at least 2021.
The latest survey shows that compared with March, analysts' highest and lowest forecasts for economic growth in the euro zone have both moved down. "The Eurozone economy has been disappointing since the start of 2018, especially after its strong performance in 2017. Although the outlook is still favorable, it seems that the Eurozone economic growth has peaked and will slow down in 2018." ING Clariant, a senior euro zone economic analyst, said.
According to the report, the appreciation of the euro has generally harmed businesses in the euro area, and the euro area companies ended the first quarter with the slowest expansion rate since the beginning of 2017. Since the beginning of this year, the euro has appreciated by about 3%. According to another Reuters survey, the euro is expected to rise another 4% against the US dollar in one year.
The latest survey showed that of 55 analysts who answered an additional question, more than 85% believed that the trade dispute between the United States and China would harm the Eurozone economy, including one who expected a significant impact.
"Even before international trade concerns became the focus, merchandise trade softened in February. Whether it was due to the strong euro or the fear of a trade war, it is not difficult to see that the euro zone's export prospects have become more challenging." ING Clariant said, "Because the European Union occupies an important position in the global supply chain, the euro area may still be hurt even if it is not the protagonist in the trade war."
Inflation rate is below target level
According to the report, after the Eurozone economy achieved the fastest growth rate since the financial crisis in 2017, the growth momentum is expected to weaken, and the single-quarter growth rate this year and next year will average between 0.4-0.6%.
The GDP growth rate for the whole year is expected to average 2.3% this year and 2.0% next year, which is the same as the March forecast.
According to reports, price pressures remain weak. The inflation rate in the next three years is expected to fall short of the European Central Bank’s target level of slightly less than 2.0%.
The average inflation rate this year is expected to be 1.5%, and in 2019 and 2020 are expected to be 1.6% and 1.7%, respectively. Despite this, it is widely expected that the European Central Bank will end its 30 billion euros (approximately 233.3 billion yuan) asset purchase plan before the end of the year.
Nearly 60 analysts, more than 90% expressed confidence that the central bank will raise interest rates before the next economic reversal, and 11 analysts expressed their confidence. But not everyone agrees with this, and the remaining five analysts expressed no confidence.
"We expect the European Central Bank to maintain low interest rates for longer, partly because the central bank is withdrawing from the quantitative easing program because it has reached technical limits, rather than reaching the inflation target. This shows that the European Central Bank will need to reduce interest rates. Stay at a low point to limit the side effects of exiting on financial conditions," said Erwin de Grotte, chief analyst for the Eurozone at Rabobank.
"In addition, even if growth continues to be higher than or close to the trend, it may be relatively slow to pass to salary growth, and then from salary growth to core inflation. Therefore, the European Central Bank will raise interest rates before the next economic reversal. It can't be said to be a certainty."
What is the "next step" of the European Central Bank?
Carsten Brzeski, chief economist at ING, said there are three possibilities for the European Central Bank's next possible measures, the first of which is to terminate the bond purchase plan in September.
This situation will follow the original logic of quantitative easing and use it as a tool to combat deflation. As the economy continues to recover, the output gap has narrowed, and the overall inflation rate has risen to at least 1%. No ECB official can seriously talk about deflation. Therefore, the end of the bond purchase plan will be a logical result.
However, this situation will not only contradict Mario Draghi's own remarks, he also did not expect quantitative easing to come to an abrupt end, but it will also bring expectations for the first interest rate hike. This will be earlier than the mid-2019 interest rate hike recently proposed by Weidmann and other hawks. Therefore, this situation is extremely unlikely, but not completely impossible.
The continuation of the bond purchase program with an end date seems to be the mainstream voice of the European Central Bank. It reflects a view that there seems to be a broad consensus within the European Central Bank that quantitative easing should end, but divergent views only exist in the timing and details of the end. Another "longer cut" is to reduce the size of the debt purchase program from the current 30 billion euros per month to 15 billion euros per month, and continue at least until the end of this year. This will be the next step for the European Central Bank to gradually end its quantitative easing policy. step.
If there is an unexpected slowdown in the Eurozone economy or inflation expectations are lowered again, it will also leave room for another continuation of the bond purchase plan after 2018. However, this may be too long for the hawks of the European Central Bank, who are clearly advocating a clear end date for quantitative easing.
A smaller debt purchase plan with an end date and a longer duration. Another compromise between hawks and doves may be a so-called "smaller debt purchase plan with longer duration", namely The bond purchase plan was extended for another six months, but the scale of bond purchases was reduced to 5 billion euros per month. This continuation may be combined with the end date.
If the weakness in the first two months of this year reappears, and if the European Central Bank’s 2020 inflation expectations remain unchanged or even adjusted downwards in June, this situation will be more likely.