Upwards
Even though EMU growth in Q3 2006 was slightly lower than expected, this certainly does not mark a trend reversal! GDP growth for the summer months will most probably be revised up, and the dynamic in the current quarter could again come close to the strong performance in the first half of this year. The upswing in the eurozone remains intact (pages 4-6).
Potential
And in 2007, the EMU economy will not lose much of its momentum. Domestic demand appears strong enough to withstand the US slowdown. Real GDP in the eurozone should grow by 2% next year. Eliminating the effects of the German VAT hike, the number would even be 2.2%. Unlike the US, therefore, EMU should grow at around potential (cf. chart below).
Concern
This alone would be reason enough for the ECB to bring the refi rate back into neutral territory. The inflationary risks of the robust economy are, however, only one reason for the ECB's vigilance. The more important concern reflects the overly generous liquidity - a view which is underpinned by the increasing emphasis that the ECB is putting on its monetary analysis (pages 7-9).
Four
The still booming lending to households and companies is, therefore, the central element for our expectation of three more mini-moves by the ECB. At mid-2007, we expect the refi rate to reach 4%.
Further topics:
- Weekly Comment: Fed and data keep USTs on a roller-coaster ride.
- Japan: The upswing remains intact.
- Data outlook: Ifo slightly weaker, business climate in Italy still robust; US leading indicators point to only weak growth.
- Market outlook: Bonds and EUR well supported overall.
