Macro Weekly Here comes more QE from the ECB
Group Economics
Han de Jong +31 20 628 4201
4 September 2015 Financial markets remain volatile as worries over developments in emerging economies and the global economy continue to affect confidence. While we think that some of these concerns are exaggerated, market turmoil could lead to a self-fulfilling prophecy. Risks to the downside are rising. Policymakers are likely to react to that threat. We have therefore changed our view on the likely policy actions by the ECB and the Fed. We believe the ECB is set to step up the size of its QE programme and we think the Fed will delay its first rate hike and not raise rates in September. Manufacturing under pressure
We remain optimistic, but confidence is tested
Recent economic data has not been strong enough to reduce
Our view has consistently been that the slowdown in Chinese
fear over the global cyclical outlook. Perhaps even the
growth is inevitable, but manageable. However, that does not
contrary. Business confidence indicators in many countries
lead to a hugely optimistic view on EMs, but we do not favour a
deteriorated in August. This is especially true for many
China hard-landing scenario. We have also consistently
emerging economies. And in many of these economies the
believed that the outlook in the US and in Europe is strong
Purchasing Managers Index in the manufacturing sector is
enough to withstand any slowdown elsewhere. This view is
below 50, indicating the sector is weak. The momentum of
increasingly tested, but we are not ready to throw in the towel.
manufacturing activity in the US also seems to be softening,
Policymakers in China have the means and the ability to
though US output appears to be still expanding. Europe has so
prevent a hard landing in our view. In addition, it seems as
far managed to buck the trend and cyclical indicators continue
though the manufacturing cycle is overshooting to the down
to look good and indicate continued above-trend economic
side. Output is developing weaker than demand. Such a
growth. How long Europe can diverge remains to be seen.
divergence is temporary by definition and we think that demand will ultimately lead output. While falling commodity
China the culprit, EM vulnerabilities exposed
prices are bad news for commodity producers, they are
The most likely culprit is China. As the Chinese economy
actually beneficial to Europe.
slows, many countries exporting to China are hit. That applies to many other emerging economies, less so to Europe and the
ECB and Fed will react
US. Not too long ago, many people were arguing that risks in
The ECB and the Fed (and other central bankers, of course)
emerging economies were actually lower than in many
have to formulate their policies against this background of
advanced economies as government indebtedness is generally
uncertainty, volatility and downside risks. At his most recent
significantly lower. This is turning out to be a very wrong
press conference, ECB President Mario Draghi opened the
assessment. Emerging economies are now suffering from a
door for more action. He indicated that the ECB’s current
range of negative trends. Lower exports to China is one.
programme of asset purchases may last longer than until
Falling commodity prices is a second, though this is partly
September next year as initially planned. Draghi had never
related to China. Third, and this applies to Asian EMs, is the
excluded that possibility, but he now made the possibility of an
depreciation of the yen that has taken place during the last two
extension very explicit. He also announced that the ECB is
and a half years or so, hurting competitiveness of other Asian
willing to buy a larger portion of specific bond issues (to be
EMs. Fourth is economic imbalances such as external deficits.
judged on a case-by-case basis), which opens the door to an
A lot of money that has flown into EMs in recent years is now
increases of the size of their monthly purchases. Draghi also
leaving, putting pressure on currencies of countries with
announced downward revisions to the ECB’s inflation and
external deficits in particular and on their domestic liquidity
growth forecasts for the eurozone economy for the period
situation. Last, but not least, is poor macroeconomic
ending in 2017.
management and political instability. Given the increased risks to the downside in terms of growth, given the fact that the new inflation forecasts show that the