In its October press conference, the ECB reiterated the downside risks it highlighted in September regarding both the outlook for growth and inflation. In particular, it called for a thorough examination of "the strength and persistence of the factors that are currently slowing the return of inflation".
Since the ECB staff released the September macroeconomic forecasts, the euro has continued to appreciate (c.6% since mid-April on a NEER basis), and emerging economies' risks have increased materially, especially in the two largest, China and Brazil. The most recent euro area hard activity data also signaled a slight deceleration of growth in Q3, while inflation should remain well below the ECB target in 2016, notes Barclays.
On the bright side, euro area "flash" composite PMIs beat expectations, rebounding to 54.0 (+0.4 point) in October on strong services confidence. The manufacturing sector remained at 52.0, and export orders even increased a further 0.5 points to 52.6, showing good resilience for now amid a slowdown in emerging economies.
"Our PMI-based GDP indicator stands at 0.4% q/q, in line with our growth forecast. We see the report as consistent with our view that domestic demand should be the engine of growth in Q4, with possible further strengthening from business investment offsetting weakness in net trade stemming from the emerging market slowdown", says Barclays.
