ECB View: De Guindos says rate cuts, more QE and looser TLTRO all possible – ECB Vice President Luis De Guindos gave an interview to Börsen-Zeitung earlier this month, which was published today. In a wide-ranging discussion, Mr De Guindos talked up the ECB’s easing options. He said that ‘If necessary, we could cut interest rates further. We could increase the volumes in our asset purchase programme. We could further improve the conditions for our targeted longer-term refinancing operations, the TLTROs. We have definitely not exhausted all our options. We have scope to take further action, and we will take further action should it become necessary’. However, he added two caveats. He said that the ‘negative side effects (of low interest rates) are becoming ever more pronounced’. In addition, he repeated the ECB’s call for fiscal easing, saying that ‘with interest rates very low for longer, fiscal policy would have a much bigger impact on the economy than would otherwise be the case.’ Although the ECB judged that recession risk was low, he noted that ‘the real threat at present is an extended phase of extremely low growth, below potential.’ At the same time ‘inflation expectations have recently shown a marked decline.’ Finally, he still judged that risks to the outlook were to the downside despite better news on Brexit and the trade conflict, though the risks were now ‘slightly less’. Overall, we do not expect further easing at the next ECB meeting, though we do think that the central bank will act again early next year as growth and inflation disappoint. (Nick Kounis)
Euro Macro: Germany’s ZEW jumps higher, signalling a quick end to the recession – Germany’s ZEW indicator for economic expectations (gauging the expectations of economists and financial sector analysts about Germany’s economy during the next six months) jumped higher in November. It rose to -2.1, up from -22.8 in November. The jump in the indicator probably reflects that worries about the outlook for Germany’s exports and industry have eased. Indeed, the details of the ZEW report show that the participants to the survey have significantly raised their expectations about the economic situation in the US, Japan and the eurozone.
Furthermore, at the sector level, the expectations about the sectors that are most closely related to exports and industry (automobile, steel and mechanical engineering) rose the most. Increasing optimism about Germany’s exports and industry seems to have been fuelled by recent communications from US and European officials, which have suggested that the chances of the US imposing tariffs on imports of cars and vehicle parts from Europe (which would hurt Germany particularly hard) have declined. Moreover, the chances of a no-deal Brexit have fallen as well. Finally, the developments in the trade conflict between the US and China seemed to be moving in the right direction, which would benefit the global economy in general.
The ZEW expectations indicators tends to track changes in Germany’s economic growth relatively well. At November’s level of -2.1, it still is below its long-term average value of 21, and the current level would be consistent with GDP roughly stabilising. This would be in line with our scenario for the German economy. On 14 November, the first estimate for Q3 GDP growth will be published. Our (and the consensus) forecast is that GDP contracted by 0.1% qoq during that quarter, which would be the second consecutive quarter of contraction (Q2 was -0.1% qoq as well). This would put Germany in a technical recession. Still, we expect this recession to be neither deep nor long as private consumption, government spending and construction output are expected to expand in the coming quarters, while the negative impact of exports and manufacturing output is expected to diminish. Indeed, we have pencilled in stabilisation in Q4 and modest growth in the first half of 2020. (Aline Schuiling)