Strong economic data, both for the eurozone as a whole and for some individual member states has recently weakened slightly. Retail sales for the region fell in November after a strong rise in October. Nonetheless, at 2.3% YoY in real terms, consumption growth still looks solid. In December consumer confidence rose to its highest level since 2007. The unemployment rate stalled at 9.8% in November. In Germany factory orders took a step back in November after surging higher in October. Industrial production however accelerated year on year and exports rose strongly. French consumer spending was stronger than expected in November. Although its course has been erratic, consumption has been on a positive trend for almost two years now.
Inflation on the rise
Data for the annual inflation rate in the eurozone showed a jump from 0.6% in November to 1.1% in December, marking the strongest monthly gain since November 2009. Just as back then, the rise was mainly driven by higher energy prices. Core inflation, which excludes energy and food prices to give a better view of underlying trends, ticked up from 0.8% in November to 0.9% in December. In our view inflation should not be a concern for the ECB but these numbers will liven up the debate about whether or not the ECB’s asset purchases should be tapered. The president of the Dutch central bank recently argued in favour of a quick tapering, albeit at the expiry of the current programme at year-end. In Germany, where the annual inflation rate jumped from 1.0% to 1.7%, calls for tapering may become even louder.
Exhibit 1: Eurozone HICP
Source: Datastream, BNPP IP
ECB will be much more cautious this time
Keeping in mind the ECB’s policy mistake of raising rates twice in 2011 only to reverse course within nine months, it looks as though the stage is set for another ECB policy error. We think however that the ECB will be much more cautious this time around. Policymakers should have learned from their mistakes and ECB president Draghi is less hawkish than his predecessor. In fact it was just after Draghi had taken over as President of the ECB that the two 2011 rate rises were reversed. So, for this year we think that asset purchase programme will not be tampered with. Nonetheless, as we signalled in our Outlook for 2017, the direction of monetary policy is slowly changing from ever more stimulus to a steady or gradually less stimulative monetary policy. Under a positive scenario the eurozone economy should be strong enough by the end of 2017 for the ECB to taper its asset purchases. If not, the ECB has a problem since the limits to quantitative easing – especially the availability of eligible bonds for it to buy – may have become a serious issue by then.