Global Daily – Praet suggests ECB stance is shifting (…but slowly)

by: Nick Kounis , Aline Schuiling , Han de Jong

ECB View: Praet hints at shift in communication in June – ECB Chief Economist Peter Praet hinted at a gradual shift in communication going forward. He said that economic growth was increasingly solid and broad-based and that the Governing Council would ‘reassess that situation in June to see if risks are even more balanced’. Meanwhile, he judged that ‘growth still needs a high degree of accommodation’. This seems to be a somewhat less aggressive stance than at the April press conference, where the press statement noted that ‘a very substantial degree of monetary accommodation is still needed’. Still, the ECB needed to be very ‘careful’ and ‘delicate’ in (communicating about) changing its stance. Despite hinting at changes in communication, Mr Praet’s judgement remains that inflationary pressures remain subdued and that there is not much evolution in terms of wages. Indeed, price pressures were not seen emerging until the end of the forecasting horizon, with the output gap not closing until ‘sometime in 2019’. Nevertheless, the ECB seems to be putting more emphasis on economic growth as a lead indicator of future inflationary pressures rather than waiting for actual (core) inflation to pick-up before changing (communication about) the stance. He said that ‘you must be sure that when the stance is changing, you need to base that on very solid growth’. This is consistent with a more traditional approach to setting monetary policy in our view. Crucially, there are problems in expanding the QE programme through 2018, given the need to keep holdings below the issue(r) limit. As such, the focus on growth is more practical than waiting for underlying inflationary pressures to be visible, as that will take a long time and would necessitate a further extension of asset purchases. (Nick Kounis)

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Euro Macro: Euro growth converging, but differences remain – The second estimate for eurozone GDP growth in Q1 as well as the rates in the individual countries were published by Eurostat today. Growth in the eurozone remained unchanged from the first estimate, at 0.5% qoq, the same rate as in Q4. At the individual country level, most noticeably, Greece moved back into recession, with GDP contracting by 0.1% qoq in Q1, following -1.2% in Q4. However, Italy also continued to underperform, growing by less than half the eurozone aggregate (0.2% qoq). At the other side of the spectrum, Spain and Portugal outperformed the eurozone by a wide margin. Spanish GDP expanded by 0.8% qoq and Portugal’s by 1.0%. Both countries are benefitting from robust growth in world trade, combined with improved competitiveness and solid growth in domestic demand. We have also looked at the longer-term trend in growth differences between the largest eurozone countries, excluding Ireland where growth has been seriously distorted by investment by large multinational companies in recent years. We found that, although differences remain, there has been a broader trend of growth convergence in recent years. Indeed, the standard deviation of yoy GDP growth has been lower on average in the years following the eurozone crisis than during the ten years before the global financial crisis and the eurozone crisis (1997-2007). (Aline Schuiling)

Euro Politics: Dutch government coalition talks collapse – Two months after the parliamentary election, coalition talks to form a new Dutch government have collapsed. The leader of the talks, Health Minister Edith Schippers will present her report to parliament and then parliament will decide what next steps can be taken. Her task was to explore the possibility of a four-party coalition. The current Prime Minister, Mark Rutte, still wants a new government to be formed before the parliament’s summer break (7 July), but that now looks ambitious. Coalition talks are held behind closed doors, so we do not know exactly what has happened. It would appear that the talks have broken down because of differences in view over immigration, where VVD and CDA stood against D66 and GroenLinks. But talks over climate policies were, apparently, also very difficult. It is possible that a new coalition will be tried. VVD, CDA and D66 are likely to form the backbone of any new government. Another party, instead of GroenLinks could get involved. The ChristenUnie (5, Social Christians) are the most logical. However, that reduces the parliamentary majority to just one, although there is talk of further support of smaller parties. Another problem with such a combination is that the ChristUnie’s views on immigration are similar to those of GroenLinks, while the ChristenUnie strongly opposes views held by D66 on issues such as euthanasia. We think a new government will be formed in the end and that it will be centrist. Nexit will not be on the agenda and the delay in forming a government will actually be beneficial for the public finances. For more, please see our note on the coalition talks here. (Han de Jong)