Euro area macro monitor

Summary and outlook

• A significant headwind to the ongoing euro area recovery has been very weak bank lending but the latest figures for lending together with the ECB’s Bank Lending Survey (BLS) provided encouraging news for the economy. BLS showed that lending standards were eased for consumers, enterprises and house purchases. In addition, the ECB’s TLTROs should result in an enhanced monetary policy transmission mechanism and in turn a stronger recovery going forward.

• Survey indicators continue to point to higher economic activity and composite PMI, new orders, suggests growth slightly below 0.5% q/q. Manufacturing PMI, new export orders increased for the first time in five months in July. This reflects that the US and China have recovered after a weak Q1. We still expect higher growth in private consumption and investments and believe there remains room for positive surprises from domestic demand as pent-up demand is high.

• Economic progress should continue to support spread compression while the ECB’s accommodative monetary policy supports search for positive yield. A better growth outlook should also result in a steeper EUR curve, while it remains possible that the ECB will succeed in boosting inflation expectations.

Details

• Inflation declined to a new cycle low of 0.4% in July driven by lower commodity prices. Inflation is set to remain very low until Q4 when food price inflation should increase. Improvements in the labour market could also slowly give upward pressure.

• The effective exchange rate has weakened since the ECB signalled it would ease monetary policy. Hence the drag on growth from deteriorated price competitiveness diminishes. The weakening of the currency will also imply higher imported inflation.

• Bank lending is still weak but after the ECB took its snapshot of banks’ balances credit growth is declining at a slower pace. If the latest improvements continue, it will be very positive for the growth outlook in the euro area.

• The ECB’s TLTRO will boost liquidity in the euro system. The potential take-up on the two TLTROs in 2014 is EUR400bn and based on the observations for net lending in May and June banks are currently eligible for EUR117bn on the TLTROs beginning in 2015 (the potential take-up depends on lending until January 2015).