Euro area’s key data have continued to disappoint in recent months. The economic growth decelerated to 0.2 percent quarter-on-quarter in the second quarter. Manufacturing productions and orders are falling, and PMIs indicate towards a continued drop in the third quarter. Softness is especially evident in Germany, where year-on-year growth dropped from 0.8 percent to zero in the second quarter, pulled down by falling exports and lower investments, but also by slower consumption growth. Core inflation, which excludes prices of energy, food, alcohol and tobacco, has hovered around 1 percent year-on-year for the past two years, showing no signs of adjustments towards the 2 percent target. Market-based measures of inflation expectations have stayed low.
Sentiment indicators imply that manufacturers are concerned about the outlook, noted DNB Markets in a research report. Risks are increasing. The U.S.-China trade war has escalated considerably, a development that is expected to have negative ripple effects to the euro area economy. Furthermore, there is an evident risk Europe’s auto industry will face higher tariffs on exports to the U.S., given the fast-approaching deadline of mid-November set by President Trump to reach a trade deal but no signs of any considerable progress between the two sides.
“We expect the ECB to announce the launch of a stimulus package on 12 September in response to the economic slowdown, weak inflation, and mounting external risks. We also expect the deposit rate to be lowered by 10bp to -0.5%, and a tier system to be set up to mitigate the negative consequences of negative rates for banks. Moreover, we expect the asset purchase programme to be restarted, in a monthly sum of EUR50bn, for six months or longer if necessary”, added DNB Markets.
