Fra BNP Paribas:
ECB: Two step forwards, one step back At times, ECB communication has been a question of two steps forwards and one step back. The press conference on 20 July offered another example of this strategy, as Mario Draghi appeared to row back somewhat from his speech at Sintra on 27 June.
The ECB president emphasised the uncertainty surrounding the inflation outlook and stated that no debate has yet been held on either the timing or even the direction of the ECB’s next move. The key message was that while the growth outlook has improved considerably and looks more self-sustaining and less vulnerable than in the past, this has yet to translate into concrete evidence of a pickup in inflation dynamics.
Hence the conclusion of Mr Draghi that a very substantial degree of monetary accommodation is still needed. The ECB remains confident that inflation will eventually pick up. But the lack of concrete evidence in this direction appears to be a greater concern than it appeared to be in Sintra, arguing for caution. In this context, the need for persistence, patience and prudence was highlighted a few times.
Mr Draghi made a number of references to monetary and financial conditions, given the market reaction to the Sintra speech, emphasising concerns over an unwanted tightening in monetary conditions. Should the euro strengthen further from here, we would not be surprised if, over the next few days, the ECB were to ramp up its rhetoric on the risks posed by tighter financial conditions to the growth and, more importantly, inflation outlook. In conclusion, the press conference was very much in line with what we had expected and does not change our view that, later this year, the ECB will contemplate gradually removing accommodation.
It suggested that the process will probably be more gradual and less automatic than the markets might have thought following the Sintra speech. This fits in well with our view that the ECB will use the September meeting to prepare the ground for an announcement later – very likely at the October meeting, we think (for more details, please see ECB: Step back in this week’s Macro Matters).
Eurozone: Strong Q2 and slightly softer Q3; stable inflation in July Last week’s May industrial-production figures reaffirmed that eurozone growth remained robust in Q2. Production increased by a solid 1.3% m/m in May, and manufacturing survey evidence suggests output might have expanded further in June. Even assuming zero growth in June, production will have increased by 1.4% q/q in Q2, more than 1pp higher than in Q1.
We think that our view that GDP growth accelerated to 0.7% q/q in Q2 from 0.6% q/q in Q1 is supported by solid production in the industrial sector and the good performance of retail sales in the first two months of the quarter, combined with the strong signal coming from survey data, with both the composite PMI and the economic sentiment indicator increasing over the quarter. Strong growth in Q2 Inflation still not where the ECB wants it Concern over tighter monetary conditions September groundwork, October announcement Chart 3: Eurozone GDP growth and survey data Chart 4: UK Soft Q2 growth
We expect our view to be bolstered on Friday, when France and Spain publish their first estimates of GDP growth for the second quarter. We expect the French economy to have expanded by 0.5% q/q, a stable pace with respect to Q1, and Spanish by 0.9% q/q, up from 0.8% q/q. Eurostat will release the flash estimates of Q2 GDP growth on 1 August. We will also have the first Q3 information this week with the release of survey data for the month of July, principally the flash PMIs released on Monday.
We expect sentiment in the eurozone to have moderated slightly in July. Both the manufacturing and services sectors are likely to have been weighed down by recent euro appreciation, prospects of a tighter ECB policy stance, signs of softening in global activity and a moderation in equity markets. Against this backdrop, we see the composite PMI for activity, a coincident indicator of GDP growth, easing to 56.0 in July from 56.3 in June, but remaining consistent with GDP growth of about 0.7% q/q, well above its potential.
We would not be surprised to see further declines in eurozone confidence indicators over the coming months. We expect eurozone underlying growth momentum to ease slightly over the second half of the year. Signs that the global manufacturing cycle has peaked and could ease somewhat could eventually weigh on eurozone manufacturing confidence, and private consumption should be hampered by the squeeze on real wages from higher inflation, although compensated to a degree by strong job creation and a lower savings rate.
That said, we expect the economy will continue to expand well above trend over the coming quarters; we see growth averaging above 2% for the whole year. As well-above-trend growth further erodes spare capacity, inflationary pressures are likely to keep building. The June pickup in eurozone core inflation to 1.1% y/y suggest the emergence of an (albeit gradual) upward trend. The 3m/3m annualised core inflation rate has picked up to 1.6%, its highest level since April 2012.
Friday’s release of preliminary CPI and HICP data for Germany, France, Spain and Belgium should shed further light on the extent to which this trend has been sustained in July. We expect eurozone core inflation (to be released on 31 July) to have remained broadly stable, at 1.1% y/y. This is likely to have been driven by core inflation remaining stable in Italy, gradually picking up in France and Spain and declining in Germany, as the often volatile recreation and culture prices retreat somewhat in July from its unusually high level in June.
Month-to-month volatility aside, we expect eurozone core inflation to remain stable at 1.1% until September, when we expect a pickup to 1.3%. Headline inflation, meanwhile, looks set to remain stable in July at 1.3% and to increase moderately over the coming months, driven by energy and core-price inflation. UK: Soft GDP growth in Q2 Recent activity data came in on the soft side, with consumer confidence and PMIs easing in June and pointing to a soft reading for Q2 GDP growth.
The NIESR monthly GDP series suggests the more likely outcome is Q2 growth of only 0.3% q/q (1.4% annualised, Chart 2), in line with our forecasts. No expenditure breakdown will be available at this stage. When it is released at a later date, strong exports are likely to provide some support; as indicators of overall GDP growth have been lacklustre, however, other components should have provided some offset. In that vein, the downward trend in consumer confidence and weak car registrations suggest consumer spending did not perform well. Construction output data also point to weak dwellings investment.
Having boosted growth in Q1, inventories may well have detracted instead in Q2. Our 0.3% q/q growth forecast is a touch below our initial expectation of 0.4% q/q, signalling a downside risk to our 2017 annual forecast of 1.5%. Importantly, it would be at odds with the Bank of England’s bullish expectation for growth of 1.9% this year, implying the need for it to revise this figure down in the early August Inflation Report
