Eurozone: An uncertain economic climate and fresh monetary stimulus – BNP Paribas

Louis Boisset, analyst at BNP Paribas, suggests that after the Euro zone growth accelerated to 0.4% in the 1st quarter of 2019, growth as a whole is likely to fall over the next few quarters.

Key Quotes

“Purchasing Manager Indices (PMIs) show that the divergence between worsening conditions in manufacturing and the resilience of the services sector remains substantial.”

“Despite a degree of stabilisation, the manufacturing sector in the euro zone, and particularly in Germany, is suffering from high levels of uncertainty, a slowdown in global trade and the economic slowdown in emerging economies.”

“Continued deterioration in manufacturing could end up dragging the services sector down, given the significant linkage between the two sectors.”

“Despite the significant level of monetary accommodation, inflation remains low relative to the 2% target.”

“For a number of weeks now, there has been a notable softening of the tone adopted by the ECB and its Chairman Mario Draghi.”

“The ECB is ready to intervene in response to the current economic slowdown and any sign of a drop in inflation expectations. The possible options include a fresh cut in interest rates, particularly deposit rates, and a return to net asset purchases as part of QE. With limited room for manoeuvre in monetary policy and any move bringing its risks, the ECB will need to use with care the weapons at its disposal.”

“Overall, given that the negative shock currently being experienced by the euro zone is essentially external in nature, a further cut in rates, short and long, as part of additional monetary easing, might fail to have the expected effect on the zone’s economy.”