ECB: How low new macro projections will go? - ING

In view of Carsten Brzeski, Chief Economist at ING, the biggest unknown at next week’s meeting should be the ECB’s latest staff projections and the Governing Council’s assessment of the economic situation.

Key Quotes

“Up to now, ECB senior officials have maintained their relatively upbeat take on the eurozone economy, despite a recent and more subtle shift towards putting more emphasis on downside risks. Back in September, the ECB saw GDP growth at 2.0% this year, 1.8% in 2019 and 1.7% in 2020. Headline inflation was expected to come in at 1.7% in all three years. In the meantime, the market consensus has clearly shifted to the downside.”

“When analysing the ECB’s projections, keep in mind that compared with the September projections, the external assumptions have changed significantly. In particular, the sharp drop in oil prices, in terms of both spot and forward prices, should have boosted GDP growth and lowered the headline inflation forecasts. While the trade-weighted exchange rate has remained broadly stable, long-term interest rates have come down, also inserting some stimulus to GDP growth.”

“Taken together, all changes in the external assumptions could add some 10 basis points to GDP growth and shave off 10 basis points from headline inflation. As regards growth, however, this should be too little to offset the impact from a weak 3Q on 2018 and 2019 growth. Any downward revisions to below 1.6% for 2019 and beyond would, in our view, signal a clear shift towards more pessimism. Finally, the forecast horizon will be extended to 2021. Keep a close eye on the inflation projections for 2021.”