Analysts at Westpac explained that the ECB September meeting affirmed the forward guidance set out in June and saw only minor changes to their activity forecasts.
"Risks to the outlook continue to be described as ‘balanced’ but it is here Draghi touched on some particularly prescient issues. In June, we were told that asset purchases will be tapered again from October before ending completely in December, and that interest rates are on hold until the end of next summer.
The combination of low core inflation and continued success in reducing slack in the labour market backs up retaining this accommodative stance. In that regard, the ECB’s macroeconomic projections saw a slight downward revision in the growth outlook due to lower external demand. The growth forecasts for 2018 and 2019 were lowered by 0.1ppts to 2.0% and 1.8% while 2020 was left unchanged at 1.7%. This reflects a quicker than anticipated return towards trend growth from 2017’s outsized expansion. The 2017 uplift was boosted by a large contribution from net exports particularly in the latter half of the year. In 2018, we have seen that fade back to more normal levels. Accordingly, the core inflation forecast was also lowered by 0.1ppts in 2019 and 2020 to 1.5% and 1.8%.
To this outlook, while Draghi emphasised that risks are still considered balanced, downside uncertainties relating to “rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently”. In the press conference, Draghi revealed that the latter two concerns are not particularly pressing at this stage. He notes that spill-overs from Turkey and Argentina have not been substantial and that the countries most vulnerable to contagion are those with high current account deficits, high fiscal deficits and high inflation – three issues the Euro Area does not have in aggregate. He also made mention of the “big changes” happening in China of a different kind. On financial market volatility, the ECB are, along with the rest of world, watching the implications of Fed tightening on other assets. But for now, this is regarded as just a “potential risk” for heightened financial market volatility. That leaves rising protectionism as the “major source of uncertainty” keeping the President awake at night. At this stage, only the tariff measures that have already been implemented are incorporated in the ECB’s forecasts.
There is, of course, a significant likelihood that these tensions between the US and China will escalate, but the extent to which this could occur is unknown. On top of the impact this has had on traded prices and volumes, Draghi is concerned about general “confidence effects”. Indeed, with global supply chains interconnected across countries, these bilateral tariffs can still impact businesses not directly involved in trade between the US and China. This uncertainty could affect investment and hiring decisions. But in that respect, as already mentioned, the risks to the ECB’s outlook are “balanced”. To these downside concerns, Draghi and the Governing Council believe that the underlying strength in the Euro Area labour market will mitigate the impact of these more global headwinds.
The unemployment rate is continuing to decline and there are signs that wages growth is starting to pick up. In addition, fiscal policy is becoming more expansionary in a few European economies. So in that sense, all we, and the ECB, can do is monitor these risks. Economic growth has slowed in 2018 but it is still positive and above trend. In coming meetings, we will be watching for guidance on the ECB’s reinvestment policy now that the asset purchase program is concluding, as well as the ECB’s view on the Italian fiscal situation – a topic largely avoided at this meeting until the “facts” become clearer. "
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