ECB cuts growth forecasts
Draghi signals deepening concern over a slowdown in the eurozone
THE European Central Bank (ECB) cut its economic growth forecasts Thursday, highlighting the risks confronting Europe’s economy even as it ended its massive fouryear stimulus programme.
“It’s a climate of great uncertainty,” ECB President Mario Draghi said at a press conference, citing trade tensions, vulnerabilities in emerging markets and volatility in financial markets. He spoke after the ECB confirmed it would keep its key interest rates—which include a minus 0.4% rate on bank deposits held at the central bank— unchanged at least through the summer of 2019.
Draghi’s comments signal a deepening concern among senior ECB officials over the state of the 19-nation economy, which has slowed sharply in recent months after outpacing the United States in 2016 and 2017.
Officials had maintained until recently that the slowdown reflected temporary factors that would soon pass.
Analysts said the change of tone suggested the ECB might delay lifting interest rates out of negative territory, where they have languished since mid-2014.
“The ECB is turning more cautious,” said Florian Hense, an economist at Berenberg Bank in London. Top officials “will have their fingers crossed that the economy does not disappoint their growth expectations too much.”
The euro slipped against the dollar during Draghi’s news conference to US$1.133, as investors digested the ECB’s more dovish tone. The common currency has slid 9% against the dollar since February, as the Fed increased interest rates three times this year, but the ECB signalled it would be slow to follow suit.
The eurozone slowdown sits uncomfortably with the ECB’s decision to end new purchases under its 2.6 trillion (US$3 trillion) bond-buying programme, known as quantitative easing or QE, this month, a move that the bank confirmed on Thursday. That decision was signalled earlier this year and comes years after the Federal Reserve and Bank of England wound down their own bond purchases.
The ECB lowered its 2018 forecast for gross domestic product growth in the eurozone by 0.1 percentage point to 1.9% and shaved its 2020 forecast by a similar amount to 1.7%.
Some analysts questioned the bank’s decision to press ahead with ending QE despite the weakening economy.
“The decision to end QE now is more about politics than economics,” aimed at assuaging ECB officials who have been critical of the bank’s bond purchases, particular- ly its German contingent, said Paul Diggle, an economist at Aberdeen Standard Investments. “If you squint hard enough, the economic data can just about justify the decision.”
The ECB softened its decision on QE by pledging to hold its 2.6 trillion stock of bonds for “an extended period of time” after its first interest-rate rise, which investors have pencilled in for late 2019.
A key concern for ECB officials is Italy, whose US$2 trillion economy shrank in the three months through September, aggravating concerns around the country’s weak banks and high government debt. But weaknesses have also emerged elsewhere: Germany’s economy contracted in the most recent quarter, and the outlook for France is also softening as President Emmanuel Macronfaces mass protests over his economic reforms.
John Taylor, a portfolio manager at AllianceBernstein in London, said the ECB missed an opportunity to phase out its stimulus programme a year ago when the economy was in much better shape.
“The longer borrowing costs are left low, the more debt is taken on, the more it affects behaviour,” Taylor said. “Investors are now more sensitive to higher credit spreads because there’s more debt.” – WSJ