The Fed's non-conventional monetary policy measures are expected to remain exceptionally accommodative for the next couple of years. The policies will continue to adapt to evolving policy goals and risks with increased clarity and market communication. The new leaders at the Bank of Japan are pursuing ‘bold' actions and emphasising the ‘clarity' of the policies, to work more effectively on confidence and inflation expectations.
On 17 April, the French government published its “stability programme” for 2013-2017, which sets out its strategy for the public finances over the period and a multi-year public finance trajectory. The main objectives are to restore the public accounts to structural balance in the medium term, to bring the public deficit back below 3% of GDP in 2014 and to concentrate the structural effort on public spending in 2014-2017.
The secondary effects of the restructuring of the public finances eroded the accounts of economic agents in the last part of 2012: household purchasing power plunged, squeezed by the growing weight of income and capital taxes, while the margin ratio of NFC declined 0.5 points to 27.7%, confirming the slumping profitability of French companies. These new factors confirm our scenario.
The ECB's press conference was consistent with additional monetary easing to come in the next few months. Risks to the recovery have increased, inflation is falling further below the 2% target and monetary transmission remains impaired. The ECB “stands ready to act”. The nuclear option of shifting inflation risks to the downside has not yet been used, but it may be the next communication step unless data improves.
If there was any doubt left, it should be clear by now that the ECB retains a strong dovish bias and remains ready to respond to any further deterioration in the economic outlook, at least via conventional tools. ECB staff forecasts have been revised slightly downwards, from very low levels, and the Governing Council discussed easing options at today's meeting. We continue to expect a 25bp Refi rate cut in Q2, with April looking increasingly likely.
France's public deficit, which was forecast at 3% of GDP in 2013, is likely to come out at 3.5% due to very weak growth of 0.2%, compared with an official forecast of 0.8%. A new, €10 billion, structural effort could have made it possible to meet the 3% target, but this could have pushed the economy into recession. As a result, achieving the 3% objective has been deferred until 2014. We are working on the assumption that the government will set a deficit target of 2.9% of GDP in 2014.
France experienced a 0.3% q/q fall-off in economic activity in Q4 2012. Although household consumption again proved resilient, total investment was down and there was more inventory downsizing. Over 2012 as a whole, French growth is likely to have stagnated, therefore. Activity is likely to remain depressed in the months ahead. The first survey data available, for January, showed a downtrend.
ECBs President Draghi further highlighted the “positive contagion” in financial markets and business confidence. At the same time, he made it clear that the ECB's monetary stance would remain accommodative as many downside risks remained. In particular, the Governing Council will monitor FX developments closely to assess the implications of a stronger EUR on activity and, importantly, on inflation.
For the peripheral Eurozone countries, the ECB took the role of the market by providing commercial banks with unlimited liquidities, indirectly contributing to the increase of Target2 imbalances. Explaining the reason behind, we will justify this policy and put into perspective such claims of Central Banks in Northern countries.
Our leading economic indicators signal a sharper decline in Q4 2012 GDP, notably in Germany. Consequently, we have lowered our estimate of eurozone growth from -0.2% to -0.4%q/q in Q4 2012. Surveys unanimously signal a rebound in eurozone activity in Q1 2013, although the signs are less clear in peripheral countries. We are maintaining our estimate of a 0.1% q/q decline in Q1 2013 GDP.