ECB Watch ECB examining further easing measures

ECB Watch
6th November 2014
AIB Treasury Economic Research Unit
ECB examining further easing measures
As expected, the ECB left policy on hold at today’s Council meeting. It cut rates at both its June and
September meetings and is still in the process of fully implementing some of the non-standard easing measures
announced in September. These include the purchase of non-financial private sector assets, consisting of assetbacked securities and covered bonds, as well as a TLTRO programme. Hence, policy is seen as staying on hold
while it continues with the implementation of these measures over the balance of the year.
The ECB hopes that the asset purchases will ease the stance of monetary policy and when combined with the
TLTRO programme, will have a sizeable impact on
the size of its balance sheet. Early indications,
ECB Refi Rate (%)
though, suggest that the measures may not be as
successful as the ECB hopes. This has sparked talk
that the ECB may have to adopt new measures in
early 2015 to loosen monetary policy further. This 3
might involve a full-blown QE programme that
would include the purchase of government bonds.
Weak trends in the economy were the reason
behind the policy easing over the summer.
The latest data show the economy remains 0
very weak. The HICP inflation rate is very low, Nov-00
Source: Thomson Datastream
standing at 0.4% in October. Meanwhile, the
recovery in economic activity remains anaemic and fragile. GDP rose by a meagre 0.2% in Q1 2014 and 0.1% in
Q2. The latest data suggest that the economy has remained very weak in H2 2014. For example, the key
Composite PMI stood at 52.1 in October, just above a 10-month low of 52.0 reached in September.
The continuing weakness of inflation and activity indicators is reflected in the latest set of bi-annual
European Commission economic forecasts published this week. These contained large downward revisions
to both the HICP and GDP forecasts for the
Eurozone. The EC now sees inflation averaging
Eurozone HICP Inflation (%YoY)
0.5% this year compared to 0.8% previously. It
cut the 2015 HICP forecast from 1.2% to 0.8%,
still way below the ECB’s 2% target rate. The EC
also slashed it growth forecasts. The economy is
now expected to grow by 0.8% in 2014 compared
to 1.2% previously, while it cut next year’s GDP
forecast to 1.1% from 1.7%.
Not surprisingly, then, pressure is mounting
on the ECB to ease policy further. In this
regard, the ECB retains an easing bias as reflected
Source: Thomson Datastream
in the fact that it still views the risks to the
economic outlook to be to the downside. Furthermore, President Draghi repeated again today that the Governing
Council is unanimous in its commitment to use additional unconventional measures should it become
necessary to further address risks of too prolonged a period of low inflation. This is taken by some to mean a fullblown QE programme that involves the purchase of government bonds. ECB staff and Eurosystem committees
have been tasked with doing preparatory work on further measures in case they are needed. Meanwhile, interest
rates in the Eurozone are expected to remain at virtually zero for a long time. The market is not
discounting any rate increases until end 2017 at the earliest, and rates are not seen rising to 1% until late 2020.
Oliver Mangan
Chief Economist
[email protected]
John Fahey
Senior Economist
[email protected]
Dara Turnbull
[email protected]
Eurozone economy continues to struggle
The Eurozone economy has grown only very
modestly since it emerged from recession in
the second quarter of last year. The most
recent GDP data show that the economy grew by
0.1% in Q2 2014. On a year-on-year basis,
growth slowed to 0.8%, from 1.0%.
Euro GDP Growth and PMI
Composite PMI (RHS)
GDP(% QoQ)
The survey data for Q3 indicate that growth -1.5
in the Eurozone remained meagre, at best, in -2.0
the quarter. The key Eurozone composite PMI -2.5
averaged 52.8 in the quarter, down from 53.4 in -3.0
Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014
Q2. Meanwhile, the European Commission
Source: Thomson Datastream
sentiment indices also indicated that the Eurozone
continued to struggle in Q3. The ‘headline’ economic sentiment index averaged 100.9 versus 102.2 in the second
quarter. Furthermore, national survey data (e.g. German Ifo, French INSEE, Italian ISTAT) indicated that activity
in the Eurozone's ‘big three’ economies remained weak in Q3.
In terms of more timely Eurozone surveys, data for October suggested that the pace of growth in the currency
bloc may have edged up slightly at the start of the fourth quarter. The PMI rose marginally to 52.1 from 52.0 in
September. The EC economic sentiment index also rose at the start of Q4, increasing from 99.9 to 100.7 in
October. Overall, though, these October readings remain below the average levels in Q3.
Turning to the latest ‘hard’ data releases, retail sales rose for a third consecutive quarter in Q3.
However, the pace of growth slowed to 0.2%, from 0.4% in Q2, with very weak data for September. Meantime,
industrial production continued on its downward trend in August, with the 3mth/3mth rate falling by 0.6%. Unlike
earlier on in the year, where falling energy output was the main drag on overall production, we are now seeing
year-on-year declines in almost all the major categories of output (e.g. durable goods, capital goods).
Meanwhile, monetary aggregates remain very weak. Growth in M3 money supply averaged just 2.1% yearon-year in Q3. This is a long way from the ECB’s target value of 4.5%. Loans to the private sector remain in
decline, falling by 1.4% in Q3, although the pace of contraction is easing. Nonetheless, continued deleveraging,
especially in the corporate sector, remains a major headwind to economic recovery.
Turning to the labour market, there have been some signs of improvement. Employment rose by 0.4%
AIB Treasury Economic Research Unit
year-on-year in Q2 after a rise of 0.1% in
Q1. Meanwhile, the employment component of
the composite PMI has been above the job growth
50 level throughout most of the year. The
unemployment rate has also fallen to 11.5% from
a peak of 12% a year ago. However, this still
represents a very high jobless rate and it has also
been stuck at 11.5-11.6% since April.
Eurozone Unemployment Rate (%)
Overall, the Eurozone recovery remains
weak and uneven. The economy is still facing
many headwinds. The on-going deleveraging by
Source: Thomson Datastream
the private sector, tight fiscal policy, restrictive
credit conditions and high unemployment, are likely to continue to act as restraints on the pace of economic
growth. There is also a marked reluctance in some key economies to implement structural reforms that would
boost growth. Thus, the recovery is expected to continue at a subdued pace and lag well behind elsewhere. GDP
growth is expected to be below 1% in 2014. The European Commission in its latest update published this
week, is forecasting GDP growth of just 1.1% for the Eurozone in 2015, after growth of 0.8% in 2014.
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