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- ECB confident inflation can keep rising once stimulus removed
- Comments in latest Bulletin on the main positive for Euro long-term
- Trade war escalation seen as key risk
The time may be ripe for the Eurozone economy to break free of its emergency support suggests a new assessment from the European Central Bank (ECB).
"The underlying strength of the economy has confirmed the Governing Council’s confidence that the sustained convergence of inflation to its aim will continue in the period ahead and will be maintained even after a gradual winding-down of the net asset purchases," says the Economic Bulletin.
Recall, it is the emergency stimulus put in place following the Eurozone periphery's financial crisis that put the Euro exchange rate complex under substantial pressure. The removal of stimulus is widely held to be a key assumption that will underpin a stronger currency over coming months and years.
Previously the ECB and Mario Draghi had been keen to underscore the importance of continued stimulus as a pre-requisite to maintaining growth and inflation in the region, yet the Bulletin suggests a tentative shift to a more confident stance.
On the main, this report is therefore positive for the Euro's long-term outlook, even if there was no discernible market response to the release.
The Bulletin includes the proviso that inflation over the "medium-term" will indeed require the supportive backdrop of stimulus.
"Underlying inflation is expected to pick up towards the end of the year and thereafter to increase gradually over the medium term, supported by the ECB’s monetary policy measures, the continuing economic expansion, the corresponding absorption of economic slack and rising wage growth."
In additional comments the Bulletin forecasts that Core inflation is expected to pick up but headline to remain around the current 2.0% level based on oil futures prices.
The Bank also confirmed a tapering of asset purchases from €30bn to €15bn a month after September and then down to zero in December 2018.
"The Governing Council anticipates that, after September, subject to incoming data confirming its medium-term inflation outlook, it will reduce the monthly pace of the net asset purchases to €15 billion until the end of December 2018 and then end net purchases," says the Bulletin.
The ECB reaffirmed the opportunity to raise interest rates may not emerge until the end of the summer 2019.
Economic indicators show sold broad-based growth "albeit slower than in 2017" added the report.
Threat from Protectionism
An overarching headwind to growth in the Euro-area is likely to be "global factors" including the threat of protectionism.
"Uncertainties related to global factors, notably the threat of protectionism, remain prominent, and the risk of persistent heightened financial market volatility continues to warrant monitoring," says the ECB.
The Bulletin highlights the tit-for-tat saga of tariffs and counter-tariffs between the US and other countries.
Global growth rates are now more contained in emerging markets although developed economies continue to grow at more-or-less their previous pace.
Financial conditions are now somewhat tighter in emerging market economies due to the stronger Dollar and global trade tensions.
Overall the data suggests a loss of momentum globally, suggests the ECB.
"Global trade indicators recorded a loss in momentum," says the Bulletin."Monthly trade data decelerated significantly and broadly across countries. Global merchandise imports contracted in April and May 2018, reversing the strong growth recorded in the first quarter, and the global PMI for new export orders fell in the five months to June."
Though the ECB Bulletin does not appear to mention it there may be some hidden upsides to the trade war.
Whilst it may cause a break of old allegiances it could also result in the formation of new ones which could be more positive for the participants.
Recent Chinese trade data, for example, showed a shift away from a reliance on US trade and an increase of imports from Europe to the tune of over 51% in July.
The surge suggests the prospect of increased trade with Europe replacing the previous relationship with the US, or at least filling some of the gap left behind as tariffs ratchet up.
The Euro rose on the back of the China trade news and whilst this does not change the fact that global trade growth appears to be faltering, it does show the trade war narrative may contain a silver lining for European exporters at least.