Daily Insight
Group Economics Macro & Financial Markets Research
27 September 2016
ECB warns of low rates forever US consumer fal Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
ECB View: ECB calls on governments to act to prevent low interest rates forever – ECB President Mario Draghi provided a testimony to the European Parliament’s Committee on Economic and Monetary affairs on Monday. His main message was that ‘actions by national governments are needed to unleash growth’. This is a similar theme that Mr Draghi has discussed at increasing length previously and reflects the central bank’s worries that monetary policy is not enough on its own to turn around the eurozone’s economic fortunes. In particular, the ECB wants to see structural reforms as well as fiscal stimulus from countries whose public finances allow them to do so. In a separate speech, ECB Executive Board member struck a similar tone warning governments that ‘if fiscal and economic policies do not in fact play this role, we risk being trapped in a low growth, low interest-rate equilibrium’. He went on to say that if interest rates went to being ‘low forever’ it would severely limit the room for manoeuvre for conventional monetary-policy tools but, even more worryingly, it would risk tearing up our social fabric.’ Clearly the ECB is stepping up its rhetoric, but there are few signs that governments are responding. We continue to think the ECB will extend its QE programme. Indeed, Mr Draghi also made it clear that ‘exit strategies’ were not being discussed. However, we agree that without government action the eurozone risks being stuck with low growth and low interest rates. Indeed, that currently looks the most likely scenario. (Nick Kounis) Euro Macro: Rise in Germany’s Ifo signals moderate improvement of economy in Q4 Germany’s Ifo business climate indicator jumped to 109.5 in September, up from 106.3 in August. Importantly, the expectations component, which tends to track GDP growth more closely than the total index, jumped higher as well. It increased to 104.5 from 100.1 in August. It has now returned to the levels of the end of last year, when GDP was expanding at a rate of around 0.4-0.5% qoq. The jump in the Ifo index deviates from the composite PMI for September, which declined (to 52.7 from 53.3 in August). Still the historical pattern in the two series shows that, if they move in different directions, the Ifo expectations index tends to lead the composite PMI, which then usually comes back into line with the Ifo indicator one or two months later. Therefore, we think the jump in the Ifo expectations index signals a pickup in GDP growth in Q4. Indeed, we think the German economy temporarily lost some momentum in Q3, probably partly due to uncertainties following the Brexit vote, but will show a moderate improvement in Q4. Indeed, our forecast for average German GDP gr owth in 2017 of 1.5% is somewhat above the consensus forecast of 1.2%. (Aline Schuiling) Euro Government Bonds: Italian government announces referendum date – The Italian government announced that 4 December will be the date for the constitutional reform referendum. Initially Prime Minister Matteo Renzi had attached his own political future to the referendum, saying he would resign in case of a ‘no’ vote, which could trigger early elections. Since then he has distanced himself from those comments, but it remains unclear what he would do. Polls suggest the outcome of the referendum is a very close call. The same is true of national polls on a future General Election. Indeed, the anti-euro protest Five Star party (M5S) led by Beppe Grillo is neck-and-neck in the polls with the Democratic Party
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Daily Insight - ECB warns of low rates forever - 27 September 2016
(PD) of Prime Minister Matteo Renzi. This means that if a ‘no’ vote in the referendum triggered new elections, it would pose a major political risk. If the M5S would come to power, the new government’s relationship with the rest of the EU/eurozone states would likely become much more difficult, and it is even possible that Italy will have a referendum about its future in the euro/EU. We continue to think that peripheral spreads will widen in the coming months, due to the referendum, as well as a number of other political risks. For more see our note Euro Rates Watch: Correction of peripheral spreads is looming - for professional clients, please see disclaimers in the document (Aline Schuiling & Kim Liu).
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Daily Insight - ECB warns of low rates forever - 27 September 2016