European Commission slashes growth forecasts ahead of key ECB announcement
05/Nov/2014 • Currency Updates•
The Eurozone’s economy is in dire condition. Growth has stalled to a barely-noticeable 0.2% annualised in the second quarter. The latest data available does not bode well for the third quarter. German data for August was particularly disappointing, while PMI business sentiment indices, the best leading indicators for the Eurozone economies, have been suggesting a continued loss of economic momentum since the spring.
On Tuesday we saw a gloomy revision to the outlook from the European Commission for both 2014 and 2015. The commission slashed expectations for GDP growth in the Eurozone to 0.8%, well down on its spring forecast of 1.2%. A lack of improvement in the economy, and employment statistics, was to blame, with weak economic performance in France, Germany and Italy lowering overall business confidence in the area. The lower forecasts show just how quickly optimism for a recovery has dissipated.
Even more worrisome is the persistent downwards trend in inflation data which, at 0.4%, is by far the lowest of any major economic area.
The latest data has shown some signs of stabilisation. The PMIs stopped falling in September, and Eurozone inflation held at the 0.4% level. The recent drop in the Euro will also be deeply welcome by the ECB. However, both growth and inflation outcomes are far below ECB targets, and we expect it to follow the lead of the Bank of Japan last week and announce further measures both tomorrow and at the December meetings.
At tomorrow’s meeting we expect President Draghi to announce further steps to make good on its promise to increase the size of the ECB balance sheet:
- Expanding the scope of the TLTRO program by increasing the amount that Eurozone banks will be able to draw from it in December, and lengthening loan maturities.
- Communicating that the ECB is ready to make outright purchases of financial instruments.
- Suggesting that sovereign quantitative easing (i.e., outright purchases of Eurozone Government bonds) is closer to implementation. However, sovereign rates are already quite low and therefore we think that this particular measure will be delayed until December.
Over the short term, the reaction of the common currency to the ECB announcements is particularly hard to gauge. Markets may actually welcome further easing measures as a sign that the ECB is ready to do whatever it takes to prevent deflation from taking hold in the Eurozone. The extreme short positioning still amongst traders will probably inject additional volatility into the first hours of trading, following the press conference. Looking past short term market adjustments, the trend towards a lower Euro is likely to continue for the foreseeable future.
If you want to find out how interest rate hikes may affect your currency trading, get in touch today on 0845 519 1009.