Draghi waits for economy to recover after special effects
FOR MARIO Draghi, some of the mist obscuring the euro area’s economy is about to clear.
As officials from Helsinki to Lisbon finalise new forecasts for policy makers meeting next week, the European Central Bank president will get fresh insights from key business confidence and industry surveys to help gauge the temperature of the economy. While he will probably be presented with a broad picture of modest growth, his main issue remains a stubborn absence of inflation.
A range of special effects from unusually warm weather to cheaper oil bolstered growth at the start of the year, when the euro area produced its fastest expansion in a year. For Draghi, who cut interest rates to record lows this year and began pumping more money into the economy, the key is whether the first quarter is the beginning of a new phase that will return inflation to the ECB’s goal or a one- off, suggesting more stimulus may be needed.
“Growth in the first quarter was probably too good to be a trend,” said Holger Schmieding, chief economist at Berenberg Bank in London.
“Even so, Draghi will take great comfort knowing the ECB has done something and the economy is moving in the right direction even if the second quarter is weaker.”
After growth of 0.5 per cent in the first three months of 2016, economists surveyed by Bloomberg predict 0.4 per cent this quarter.
They see expansions between 0.3 per cent and 0.5 per cent in the region’s four largest economies.
A survey of purchasing managers last Monday showed that growth in the euro- area’s private sector unexpectedly slowed in May, with new orders expanding at the weakest pace since January last year.
A gauge of manufacturing and services activity slipped to 52.9 from 53 in April, Markit Economics said.
Analysts surveyed by Bloomberg predicted a slight pickup. Measures for the region’s two largest economies exceeded expectations.
“We were a little surprised by the periphery, given the strong data from Germany and France,” said Johannes Mayr, senior economist at Bayerische Landesbank in Munich. “We don’t expect growth in the euro zone to be as high as it was in the first quarter, but no major setbacks either.”
In Germany, the Bundesbank has expressed confidence that the underlying strength of the economy remains intact, though it’s also forecast slower expansion this quarter. The Ifo institute’s business confidence index last Wednesday will provide some clues on the severity of the slowdown.
“In the first quarter, growth was helped by one- offs – in Germany, there was a mild winter that helped construction, and in France there was a very strong rise in consumption,” said Aline Schuiling, senior economist at ABN Amro Bank in Amsterdam.
“You will see payback in the second quarter.”
The Spanish and Italian economies are also set to get a health check this week. In the former, details on GDP will provide insight into the strength of consumers as the nation gears up for its second election in six months in June.
Peter Praet, the ECB’s chief economist, will offer his views on reigniting growth at an event in Paris on Tuesday before heading to a conference in Madrid that will also feature Governing Council members Klaas Knot, Francois Villeroy de Galhau and Luis Maria Linde.
Officials have homed in on their message recently that while they’re ready to act again if needed, monetary policy alone isn’t enough to create sustained growth, urging politicians to do their part with structural reforms.
The Governing Council devoted a large part of its Apr 20 to Apr 21 meeting to the issue, according to an account published last week, and euro area finance ministers will have a chance to discuss the matter when they gather in Brussels last Tuesday to talk about debtrelief options for Greece.
The nation still has scope to rattle, having repeatedly threatened to splinter the single currency.
The ECB expanded stimulus in March, when staff projections put euro- area growth at 1.4 per cent this year and 1.7 per cent in 2017, with inflation of 0.1 per cent and 1.3 per cent, respectively. Since then the European Commission cut its consumer-price forecasts, to 0.2 per cent and 1.4 per cent.
Frederik Ducrozet, senior economist at Banque Pictet & Cie in Geneva, said he expects Draghi will present updated forecasts next week that are slightly more optimistic on GDP and prices, reflecting looser policy. “The challenge for the ECB is they don’t want to sound over confident,” he said.
“They want to give policy measures time to work, not sound complacent and reassure they’re ready to do more.”