Eurozone economy resilient, but downside risks put pressure on ECB to add stimulus

The eurozone cyclical recovery continues to be encouraging, supported by consumption. The manufacturing PMI improved to 52.3 in October (52.0 previously) and growth should remain resilient in Q4. But, many downside risks persist. At its October meeting, the ECB warned about headwinds to inflation coming from the high output gap, a stronger euro (+6% REER since April), and a potential further fall in commodity prices. 

In addition, the flow of loans to nonfinancial corporations has stalled since last spring. As a result, the economists expect further easing at the 3 December meeting. An extension of the size and duration of QE is likely at this meeting, but it may not boost credit demand significantly (given the limited impact so far). Therefore, the ECB could also consider cutting the deposit rate. This would likely drive eurozone rates deeper into negative territory, putting downward pressure on the currency.