Growth concerns continue to plague the Eurozone as ECB looks to end QE
ECB to end QE as growth slows in the Eurozone
This week, the European Central Bank will be holding its monetary policy meeting. The last meeting for this year, the Central Bank will be announcing an end to its QE program.
The crisis-era stimulus program which began in 2015 saw the European Central Bank purchasing massive amounts of sovereign and corporate bonds in a bid to revive the economy
Despite the announcement to end its QE program, the ECB maintains that interest rates will not change. The Eurozone interest rates are near or at zero, marking a historic low.
The Central Bank faces uncertainty as far as the Eurozone economy is concerned. Growth is seen faltering, and inflation growth remains uncertain.
Eurozone manufacturing activity continues to remain weak
Last week, Markit’s PMI data for the manufacturing sector showed that business continued to ease. Manufacturing activity tumbled to 51.8 in November. This was the lowest reading in the index since August 2016. In October, manufacturing PMI was at 52.0.
The manufacturing PMI signaled that growth continued to slow for the single currency. The weakness was seen centering around the investment goods sector. Markit said that capital goods producers showed a net decline in production and new work orders.
Export activity from the Eurozone also declined for the third consecutive month while cost pressures remained elevated.
Growth in the so-called big four economies also registered general weaknesses in the manufacturing sector contributing to the overall decline.
Italy posted a second consecutive decline in manufacturing as the regional PMI fell to the lowest level in four years.
The French manufacturing PMI saw growth stagnating while Germany witnessed the weakest expansion in over two and a half years. The Dutch economy, however, managed to break the trend as manufacturing activity expanded. The pace of growth, however, slipped to the lowest levels in two years.
Services sector expands at the weakest pace since 2016
Services PMI data showed a modest decline to 53.4 in November from 53.7 in October. This was slightly higher than the flash estimates. Germany’s services sector hit a six-month low at 53.3 while French services PMI came out modestly better at 55.1.
Data from the private sector in the Eurozone was not that encouraging either. The final Eurozone composite purchasing managers index fell to 52.7 in November from 53.1 the month before.
There was an overall decline in the private sector growth led by Germany. This was the weakest pace of expansion in over two years.
Chris Williamson, the economist at IHS Markit, said, “The final Eurozone PMI for November came in higher than the flash reading but still only points to modest GDP growth of approximately 0.3 percent in the fourth quarter, suggesting the region remains stuck in a soft patch.”
ECB to announce an end to QE but maintain a cautious tone
The ECB will be releasing its quarterly growth forecasts at this week’s meeting. The estimates are expected to be revised lower compared to the September data. This comes as the European Commission’s autumn economic forecasts signaled a general decline in growth.
Consumer prices, which are one of the essential indicators for the monetary policy has also been trending lower. The recent decline in oil prices could add further downside pressure. Headline inflation in the Eurozone has been averaging around 2.0%, the ECB’s inflation target rate for the past few months.
However, underlying pressures as seen from the core inflation data continue to remain weak. With most of the gains in consumer prices coming from higher oil prices, inflation could take a hit in the coming months.
As a result, the ECB could be seen taking a cautious stance at this week’s monetary policy meeting. Therefore, while the Central Bank will still announce an end to its QE program, there is a likelihood that it will downplay any hawkish expectations.