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Eco Focus is an aperiodic publication providing up-to-the-minute analysis of a current topic.
Our review of current research suggests that there are reasons to believe that the stall in Q1 real GDP may not have been as dramatic as previously thought. Output growth, as measured by the income-side of the national accounts, has been tracking at a stronger pace than GDP and issues of residual seasonality have depressed Q1 GDP growth measures. We believe the balance of evidence supports the contention that Q1 seasonally adjusted real GDP growth rates are regularly understated by around 1½ percentage points.
Judged by its immediate objectives, ie, a drop in sovereign interest rates and the risk premiums of so-called peripheral countries, the monetary policy of the ECB is a success. In this connection, does the manifest success already achieved go beyond the originally hoped-for results? Historically ultra-low (if not almost zero) nominal interest rates, even on very long maturities, and, even more to the point, negative interest rates, are raising thorny economic issues – to put it mildly.
The UK general election on May 7th is expected to result in another hung parliament: neither the centre-left Labour Party nor the centre-right Conservative Party is likely to win an outright majority in the House of Commons. The Conservatives are marginally ahead in the projections of seats, although the first-past-the-post system favours Labour. Forming a coalition is unlikely to be easy and might require more than two parties in order to get a majority in the 650-seat Parliament.
Today Mario Draghi reaffirmed the ECB's strong commitment to asset purchases until the Governing Council sees "a sustained adjustment in the path of inflation". While the tone of the statement was marginally more positive ("risks have become more balanced"), the renewed focus on inflation "trends", ignoring one-offs and temporary deviations, suggest that the ECB will refrain from major policy changes for now.
The ECB's Bank Lending Survey for Q1 2015 was consistent with a further improvement in the Eurozone credit cycle, including a better transmission of monetary policy transmission to SMEs. The missing link to a sustainable recovery remains investment which contributed negatively to loan demand, with the exception of Spain. The ECB will need to see stronger hard data before it turns more confident about investment prospects.
We expect the ECB to show a steady hand in QE implementation at its regular policy meeting on Wednesday, playing down speculation regarding an early tapering of asset purchases. The Governing Council should also reaffirm that -0.20% is the “effective lower bound” for the deposit rate, as stated in the March accounts.
What is at stake in the near-term for Greek authorities is to secure financial support to meet a tight repayment schedule which implies to step backwards on several campaign promises while maintaining its support home. But what is at stake for Greek people in the longer term is to find a lasting solution for the debt problem which does not stake a claim on future growth prospects.
The Russian crisis is spreading to the French economy via several trans¬mission channels. Foreign trade is affected, of course. Conversely, direct investment flows seems slightly affected by the situation. Another effect will spread via a deterioration in confidence levels and more marked wait-and-see agent behaviour. Nor should we forget that, although it did not trigger the crisis, the oil price fall has acted as an accelerator in the Russian crisis.
The take-up at today's TLTRO exceeded expectations, with 143 banks borrowing an extra EUR97.8bn from the ECB. TLTRO will help expand the ECB's balance sheet at the margin but, more importantly, they will contribute towards improving monetary policy transmission and to lower borrowing costs even further. We continue to look for a stronger pick-up in Eurozone bank lending in the coming months.
From a macro perspective, yesterday's biggest surprise came from the upbeat revisions to medium-term ECB staff forecasts, with 2017 GDP (2.1%) and HICP (1.8%) median projections reflecting a high degree of confidence over the impact of QE on financial markets and the economy. However, it must be noted that, as a result of a change in methodology, the 1.8% forecast for 2017 HICP incorporates the full expected impact of monetary-easing measures for the first time ever.
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