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Eco Focus is an aperiodic publication providing up-to-the-minute analysis of a current topic.
The combination of falling oil prices and a lower-than-expected TLTRO allotment is likely to trigger both contingencies for fresh ECB action, ie, a further deterioration in the inflation outlook as well as the inability of existing measures to expand the balance sheet by EUR1trn.
The ECB did not move closer to sovereign QE at today's meeting. In spite of another downward revision to growth and inflation staff projections, the ECB delivered nothing but some futile communication changes. Even the subtle shift from an "expectation" to an "intention" to expand the balance sheet could not be agreed unanimously.
An improving job market and stronger wage gains are expected to be the key driver of the housing recovery next year. We look for housing starts to rise to 1.13 million units in 2015 and 1.38 million in 2016. Mortgage lending standards remain very tight and an expected up-drift in mortgage interest rates as the economy improves will throttle the pace of the recovery. However, signs of easier mortgage financing for credit-worthy borrowers will help at the margin.
The Autumn Statement (to be published on 3 December) will likely reveal significant upward revisions to budget deficit forecasts mainly due to disappointing growth in receipts. Despite the deterioration in public deficit being mostly structural in our view, the government's fiscal mandate expressed in cyclically-adjusted terms would not be out of reach, although by a narrower margin.
In its November Inflation Report the BoE revised "materially lower" its projections for CPI inflation, thereby reinforcing the recent shift in market expectations for a later and more gradual path for monetary policy tightening than expected in August. The revisions have been prompted by a much weaker-than-expected actual CPI inflation and greater disinflationary forces coming from abroad.
The ECB has made a number of important dovish changes to its communication, thereby reaffirming its current strategy without any ambiguity. (1) The reference to a roughly EUR1tri balance sheet expansion target has been included in the introductory statement. (2) The ECB remains unanimous in its commitment to ease further if needed and has tasked its staff with “timely preparation” of such unconventional measures. (3) The Governing Council sees indications for downward revisions to staff forecasts in December.
To date, the impact of the CICE (Tax Credit for Competitiveness and Employment) has been patchy. The margin ratio of non-financial companies edged up slightly at the start of the year, but fell back in Q2, and investment continued to adjust. The chosen target range of salaries seems to be having a more pronounced impact on wages and employment than on profitability. The CICE is having a positive short-term effect, but the longer-term impact could be more finely-shaded than expected.
We foresee an annual real GDP growth at 0.5% in 2014. Economic activity is capped by various factors: the business climate; structural issues; and the high unemployment, production facility closures owed to the crisis. These constraints, although still present, should ease in 2015. If the uptick in Eurozone activity is confirmed, volume GDP growth could come in at 1% in France, largely thanks to the positive effects of the structural reforms implemented.
The French government has announced its new public deficit forecasts for 2014 and 2015. These are sharply higher, with a deficit of 4.4% of GDP (compared with the previous estimate of 3.8%) in 2014, and of 4.3% in 2015 (3% previously). The target of a return to a 3% deficit, required by the EU Treaties, has been deferred to 2017. The growth forecasts underpinning the draft Finance Act for 2015 are set at 0.4% in 2014 and 1% in 2015.
The ECB unveiled the details of its ABS and Covered Bonds purchases programmes that will last for at least two years, sticking with 'Plan A' as we expected. The ECB will purchase senior and guaranteed mezzanine ABS tranches in both primary and secondary markets. Retained securities will be included under some conditions, boosting the pool of potential interventions by some margin. All in all, Draghi mentioned a "potential universe of purchases up to EUR1trn" while maintaining a certain degree of constructive ambiguity.
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