Over the past weeks, German data has provided quite a disappointment after July factory orders came in below expectations at 0.2% m/m vs. 0.5% m/m. In addition, July industrial production was also very weak. Consensus bet on a quasi-fl at print at 0.1% m/m but the figure was released in negative territory at -1.5% m/m. Germany’s economic data is very troubling, especially when we consider that the country is the main driver of the Eurozone.
Europe’s fi rst economy is clearly decelerating and the benefi ts from the ECB’s QE program remain to be seen. Since January 2015, the ECB QE program has topped 1 trillion euros in purchases. The program was set to cease once an adjustment in the inflation path occurred. For the time being, German and European CPI are at 0.4% and 0.2% y/y respectively.
Draghi has mentioned at the ECB press conference held earlier this month that infl ation is set to remain low, exactly like in Japan. In terms of growth, the ECB has slightly raised its forecast for growth in 2016 to 1.7% from 1.6% but has revised down the ones for 2017 and 2018 (both to 1.6% from 1.7%).
The ECB has maintained its rates unchanged as widely expected by markets. Some policymakers have recently expressed the concern that negative interest rates could be detrimental to the banking sector and put banking profi ts at risk, especially in the event of rates going even deeper in negative territory.
Like other central banks, the ECB is starting to run out of weapons. Indeed, the scarcity of bonds is making it increasingly diffi cult for the ECB to continue its massive asset-purchase program. Recently, bond yields have slightly risen, on renewed hopes that the end of free money will end by the Fed raising rates again. So this small rally is definitely supporting central banks and in particular the ECB. Still, those slight higher yields are certainly helping, for the time being, the ECB from having to add further stimulus.
At some point, we may consider other monetary policy tools such as buying stocks or helicopter money despite Draghi keeping on repeating that this has not been discussed yet amongst policymakers. Anyway stimulating the economy must be done or a great recession can be triggered.