Global Daily – ECB heads for more stimulus despite court ruling

by: Nick Kounis , Aline Schuiling

ECB View: Strategy to deal with German court unclear but stimulus is still on the cards – The German Constitutional court’s ruling (see our note from yesterday) does not seem to have had any impact on the future direction of the ECB’s monetary policy. The Governing Council’s statement in response to the decision reiterated its commitment to ‘doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim and that the monetary policy action taken in pursuit of the objective of maintaining price stability is transmitted to all parts of the economy and to all jurisdictions of the euro area’. In addition, the Governor of the central bank of France, Francois Villeroy, made clear today that the ECB would likely step up monetary stimulus before long given the deteriorating outlook for inflation and the ECB’s ‘total’ commitment to its inflation mandate. In remarks to the finance committee of the French National Assembly, he asserted that ‘in the very name of our mandate, we will be able to go further, and we will most likely have to go further’.

Meanwhile, the ECB’s exact strategy for dealing with the court ruling is unclear at this stage. In yesterday’s press statement, the Governing Council simply noted that ‘the Court of Justice of the European Union ruled in December 2018 that the ECB is acting within its price stability mandate’. This may signal that the ECB intends to ignore the ruling of the German court based on the view that the ECJ has jurisdiction not only over the ECB but also over the implementation of monetary policy by Eurosystem central banks, including the Bundesbank. Clearly, this is a grey area. However, remarks by the Estonian central bank Governor, Madis Muller, suggested the ECB would produce the analysis necessary to satisfy the German constitutional court. He explained that the Governing Council ‘will certainly be able to demonstrate that when taking monetary policy decisions…the effects of all sorts of (factors) are weighed in every sense by the ECB’. He added that the ECB still needs to discuss its approach and that ‘this is a delicate situation for the ECB as its not directly addressed to the ECB or even German Bundesbank, but to German government and the Bundestag’. (Nick Kounis)

Euro Macro: The consumer collapse – Eurostat published its report on retail sales for March today. The volume of sales plunged by 11.2% mom, which reflects that by around the middle of March most eurozone countries had gone into lockdown to prevent the spreading of the coronavirus. The division into main components clearly illustrates the impact of the lockdowns, as in most countries people were allowed to leave their homes only if they needed to buy groceries or pharmaceuticals. Indeed, the volume of sales of food, drink and tobacco rose by 5% mom in March, whereas that of non-food products dropped by more than 23%. Within the category non-food, the sharpest drop was recorded in sales of textiles, clothing and footwear (-38.9%), while the smallest decline was in pharmaceutical and medical goods (-0.5%). Meanwhile, sales in the category mail orders and internet increased by 2.6% mom, which suggests that only a limited share of the normal non-food purchases in stores was replaced by online purchases. Indeed, we think that the uncertainties related to the outbreak of the coronavirus and its impact on the economy and the labour market have induced consumers to immediately tighten their purse strings.

Looking at the largest individual countries, the sharpest drops in retail sales were registered in France and Spain (-17.4% and – 14.4%, respectively) and the smallest in Germany and Belgium (-5.6% and -5.5). Italy and the Netherlands have not yet published March data. Besides retail sales, car sales have also collapsed since the start of the corona crisis, with new passenger car registrations in the eurozone dropping by more than 56% in March. Although Italy has not yet published retail sales for March, it has already published data for new passenger car registrations for March and April. These fell by almost 83% mom in March and by another 86% mom in April. In Germany new passenger car registrations dropped by more than 10% in March and by almost 44% in April. All told, the data for retail sales and car registrations indicate that private consumption collapsed during the lockdowns, but also suggest that spending was reduced due to a rise in precautionary savings by consumers due to the uncertainties related to the crisis. Looking ahead, we expect that a sharp deterioration of labour market conditions to continue to weigh on private consumption throughout this year, so also after the easing of lockdowns. (Aline Schuiling)