Global Daily – ECB more concerned about the outlook

by: Nick Kounis , Aline Schuiling , Bill Diviney

ECB view: December meeting account signals downside risks to growth and inflation – The account of the ECB Governing Council meeting of 13 December shows that members discussed the economic outlook and the balance of risks to this outlook quite extensively. The account mentions that “reference was made to a recent deterioration in business confidence and disappointing PMIs, which “was seen as affecting business investment and cautioned against being complacent about downside risks to growth”. Also it was argued that, unless all shocks affecting the latest figures, which had been weaker than expected, were considered to be of a purely temporary nature, this should have moved the balance of risks to the downside”. Still, on the other hand is was argued that “a further decline in oil prices since the publication of the ECB’s latest projections, and the likelihood of more stimulus coming from fiscal measures posed some new upside risks to the growth outlook”. Therefore, the Governing Council decided that it would communicate that “while the risks surrounding the euro area growth outlook could still be assessed as broadly balanced, the balance of risks was moving to the downside”. As we have communicated earlier, we expect the ECB to make a further dovish shift in the coming months. We have been strengthened in our view by the fact that economic data that have been published since the ECB’s December Government Council meeting (both regarding the eurozone and the global economy) have disappointed, while financial conditions have tightened further. Indeed, we expect the forward guidance on interest rates to change following further downgrades to the outlook, and we think that the central bank will signal that interest rates will be left on hold through 2019 by the June meeting. We do not expect the ECB to end reinvestments until late in 2021. Finally, we expect a TLTRO extension to be announced in March.  (Nick Kounis, Aline Schuiling)

UK Politics: Another Brexit referendum looking more likely – Opposition Labour Party leader Jeremy Corbyn today called for a General Election to resolve the parliamentary impasse over Brexit. With Prime Minister May’s withdrawal deal unlikely to win the support of MPs in next Tuesday’s vote, and her ‘Plan B’ now required to be put to parliament by the end of next week, Mr Corbyn was seeking to get ahead of events in proposing to call a vote of no confidence in the government as soon as it is most likely to succeed. Labour’s preference, decided at its party conference last October, has been to seek an election first (on a manifesto pledge of negotiating Labour’s own deal with the EU), and failing that, ‘all options are on the table’ – including a second referendum. Corbyn today reiterated that stance.

It looks likely that the confidence vote will indeed fail. While May’s government has only a slim majority, there is little appetite in the Conservative Party (or DUP) for another election, and a confidence vote would require Conservative MPs voting to bring down their own government. Assuming May’s Plan B (whatever that might entail) is also unpalatable to parliament, and with a confidence vote also failing, the last major viable option for parliament would be another referendum, which is looking increasingly likely. (Bill Diviney & Nick Kounis)