Euro zone economy to hum along despite Trump and Brexit

Euro zone economic growth will hum along at a modest pace over the coming year despite the US election and Brexit, according to economists in a Reuters poll .

Despite what appears to be a strong likelihood for a US interest rate rise next month, the European Central Bank looks set to keep going the other way, announcing an extension to its quantitative easing (QE) programme beyond March 2017.

Following the shock from the Brexit vote, which has not hit either UK or euro zone growth in a material way, it appears that political uncertainty will continue holding back the euro zone from making any more progress on growth.

Italy holds a referendum on constitutional reforms less than a week before the ECB’s policy meeting next month, and there is a packed calendar next year with national elections scheduled in Germany, France and the Netherlands.

“The recent sequence of anti-establishment votes has brought upcoming political events in the euro area into sharper relief. With this in mind, and with both economic growth and consumer price inflation still tepid, we expect the ECB to delay and pray when it meets next month,” Florian Baier, economist at Fathom Financial Consulting, wrote in a note.

Minutes from the ECB’s meeting last month released on Thursday showed policymakers suggested that December would be a key month for the future course of policy. There was also evidence of concern about weaker wage growth, suggesting further easing is likely.

Extension

Over 80 per cent of the economists in the

Reuters

poll who had a view on what the ECB would probably do next month picked an extension to the QE programme beyond the originally-planned end in March 2017 as the most likely option.

Some of those economists suggested the central bank would need to make technical adjustments to its QE programme to widen the universe of eligible bonds it can buy.

A few respondents said the ECB could expand its monthly QE amount from the current €80 billion or change the composition of assets it buys. Only one forecaster said the ECB would make no further changes to policy.

The continued focus on monetary stimulus runs against growing calls for a fiscal response to economic trouble.

Britain is likely to rely on fiscal policy in the future, according to a separate Reuters poll, which also concluded decisively that the Bank of England would not cut interest rates or increase the size of its asset-purchase programme again any time soon.

This week the European Commission called for modest fiscal easing in the euro zone. But it would be difficult to achieve politically as Germany, which is running a surplus but has committed itself to fiscal austerity, is the only country in a position to make a difference.

Currency bloc

The latest poll of over 60 economists predicted the currency bloc will maintain its current 0.3 per cent quarterly growth pace for the third and fourth quarter of this year after a surprisingly robust start to the year. That is unchanged from the October poll.

However, over three-quarters of the respondents who answered an extra question said the risks to their growth forecasts were skewed more to the downside and gave a 15 per cent probability of a recession over the coming year, up from a 10 per cent chance given last month.

The outlook for inflation also remained weak. Inflation, likely to average 0.2 per cent this year, will only manage 1.3 per cent in 2017, well short of the ECB’s close to 2 per cent target.

In the sample of over 50 respondents, not a single forecaster pegged inflation at 2 per cent over the coming year. – Reuters