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TLTROs raise concerns about the doom loop There was record demand for the ECB’s ultra-cheap Targeted Longer-Term Refinancing Operations this week, at €1.3 trillion. (See here .) This is not surprising given that the interest rate on these loans will be …
19th June 2020
If the recent increase in US retail sales is anything to go by, consumption in the euro-zone will have recovered sharply now that the lockdown restrictions have been eased. Indeed, evidence from French and Spanish bank card transactions data suggest that …
18th June 2020
Data published today show huge demand for the ECB’s targeted lending to commercial banks. So far, these operations and government loan guarantees have been successful in raising bank lending to the private sector, and there is scope for the ECB to make …
This morning’s decisions by the SNB and the Norges Bank to leave interest rates on hold at -0.75% and zero respectively were never really in doubt. Both banks are set to leave policy unchanged throughout our forecast horizon and, in the case of the SNB, …
There are increasing signs that the Swedish economy has weathered the crisis better than we first feared. Accordingly, we now expect GDP to contract by ‘only’ 2.5% this year (previously -7.5%). It has been evident for some time that Sweden’s economy would …
16th June 2020
Perverse surge in hourly wage growth won’t last beyond Q2 The surge in nominal hourly labour costs growth in Q1 primarily reflects a collapse in hours worked as lockdowns restricted economic activity at the end of the quarter. This is likely to be …
The EU’s moves towards an unprecedented joint fiscal stimulus and the ECB’s commitment to buy unlimited amounts of government debt have greatly reduced the risk of a euro-zone debt crisis in the coming year or two. However, these measures are intended to …
15th June 2020
The latest high frequency data indicate that economic activity in the Nordic economies has continued to recover in recent weeks, with trips to shops and restaurants now close to pre-crisis levels in Sweden, Denmark, and Norway. (See Chart 1.) Sweden’s …
12th June 2020
Economic activity fell by about a quarter This week brought yet more evidence of the severity of the collapse in output, as well as the variation between countries. The third estimate of euro-zone GDP in Q1 showed that the economy contracted by 3.6% q/q. …
Sweden is getting off comparatively lightly The 11% peak-to-trough drop in Swedish household consumption between February and April puts paid to any notion that Sweden has escaped unscathed following its light-touch lockdown. Nonetheless, as grim as they …
A long, slow climb from the April trough The collapse in euro-zone industrial output in April will have been partly reversed in May and June, but the recovery will be much more gradual than the slump. Nobody would dispute Eurostat’s observation that the …
The Swiss National Bank and the Norges Bank are all but certain to leave their policy settings unchanged at the scheduled announcements next Thursday (18 th June) and for the foreseeable future. Recall that the SNB left interest rates on hold at -0.75% at …
11th June 2020
TARGET2 imbalances are set to rise to record levels over the year ahead on the back of the ECB’s planned wave of asset purchases. While this may be dismissed by some as a benign and technical side-effect of the ECB’s policies, it would indicate that, …
Pick-up in Swedish inflation not a game changer The rise in Swedish inflation in May ties in with signs that the economy has got off comparatively lightly by virtue of its light-touch lockdown. That said, the May figure was skewed in part by temporary …
Currency-driven inflation boost to fade in H2 Recent falls in the krone contributed to the pick-up in core inflation in Norway in May, but this effect is likely to fade in H2. Accordingly, the Norges Bank will be in no rush to tighten monetary policy. The …
10th June 2020
As the crisis in Italy escalated, record numbers of disillusioned jobseekers dropped out of the labour force, causing the unemployment rate to fall. Now that the lockdown is being lifted and activity is recovering, many of those people should return to …
9th June 2020
GDP will recover slowly after huge fall in Q2 The sharp fall in GDP in Q1, confirmed by data released this morning, will pale in comparison to the contraction in Q2. We think it will then take several years for the economy to return to its pre-crisis …
April the weakest month, followed by slow recovery The slump in April was even bigger than the previous record set only a month ago. While the data should improve from May onwards, output probably won’t get back pre-coronavirus levels for at least two …
8th June 2020
SNB breathes a sigh of relief as the franc slides The positive policy moves out of Europe – including the ECB’s decision yesterday to increase the size and duration of its Pandemic Emergency Purchase Programme – have reinforced the sense that policymakers …
5th June 2020
The economic data released this week have simply confirmed what we already knew: that April was completely catastrophic for the euro-zone economy but that there has since been a gradual resumption in activity throughout the region. Euro-zone retail sales …
The latest high frequency data show that economic activity has picked up a bit in the past few weeks. Consumers have been returning to the shops and restaurants. (See Chart 1.) But some sectors such as tourism and hospitality are yet to get back on their …
The ECB’s decision to increase the size and duration of the PEPP should sustain the positive sentiment towards the euro-zone in the near term and reinforce the sense that, for now, European policymakers have got their act together. But more difficult …
4th June 2020
Things can only get better April’s euro-zone retail sales data confirm that household consumption growth took a beating at the start of the second quarter. There should be a sharp, though partial, rebound in May as lockdowns were eased, followed by a …
Swiss deflation here to stay; Sweden set to outperform The further decline in Swiss inflation in May came as no surprise, but April’s private sector production data from Sweden add to signs that the economy has reaped some benefit from its light-touch …
Disruption to supply chains and depressed demand mean that euro-zone goods exports will slump this year, hitting open economies such as the Netherlands and Germany the most. But the hit to services exports, notably tourism, is likely to be bigger, leaving …
3rd June 2020
Unemployment set to rise steadily, but not as far as we had feared The remarkably small increase in unemployment in the euro-zone reflects the success of the government job subsidy schemes and an exodus from the labour force in Italy. We suspect that the …
Limping out of lockdown The final Composite PMIs add to the evidence that economic activity picked up in May, but it remains well below normal. They also point to substantial downward pressure on inflation. The euro-zone Composite PMI for May was revised …
A big fall in output, but Switzerland is comparatively well placed The sharp fall in Swiss GDP is Q1 was in line with the general pattern seen in other countries, and Q2 is set to be much worse. However, now that lockdown restrictions have been eased, we …
The ECB has been purchasing a disproportionate share of Italian government bonds, but they are less heavily skewed towards Italy than we had anticipated. This in turn means that there may be less risk of a renewed flare-up of tensions over the ECB’s asset …
2nd June 2020
The gradual recovery is underway The partial recoveries in the manufacturing PMIs in May offer encouragement that activity is recovering now that lockdowns have been eased. (See Chart 1.) The small pick-up in the Swiss manufacturing PMI in May, from 40.7 …
Inflation expectations are not always a good leading indicator of inflation. However, the decline in most measures of inflation expectations in the past two months may be a cause for concern at the ECB. Rather than being a guide to future inflation, …
1st June 2020
A Hamilton moment? The main event this week was the publication of the EC’s blueprint for joint borrowing, building on last week’s Franco-German proposal. (See here .) This has been hailed by some as a “Hamilton moment”, referring to the 1790 decision by …
29th May 2020
Skingsley leaves the door open to a repo rate cut This morning’s upward revision to Swedish Q1 GDP, from the initial estimate of -0.3% to +0.1%, adds to the evidence that the country has enjoyed some economic benefit from its light-touch lockdown. That …
Disinflationary pressures mount The further fall in euro-zone inflation in May took the headline rate to within a whisker of zero and downward pressure on prices is set to persist while demand remains exceptionally weak and unemployment rises. The …
Bank lending to firms jumped again in April, suggesting that government loan guarantees and cheap ECB funding for banks are having the desired effects. But the central bank’s work is far from done. We expect it to announce a further increase in its …
The ECB is likely to increase the PEPP by a minimum of €500bn next week. Policymakers may also say the PEPP will run until at least mid-2021. We no longer anticipate a further reduction in the deposit rate. Policymakers have signalled their intention to …
28th May 2020
While Sweden’s economy has fared better than the worst-affected countries, as a result of its comparatively light-touch lockdown, it is still set for a year to forget. We expect the decline in GDP this year as a whole to be in a similar ballpark to that …
The euro-zone is not suffering from excessive leverage among banks and households, or slow and counter-productive responses from policymakers, which held back its recovery from the last two crises. But the current downturn still throws up some of the same …
The prospect of a joint European fiscal response has helped to ease upward pressure on the Swiss franc and means that there is light at the end of the tunnel for the SNB following its recent bout of FX interventions. While monetary policy will remain …
Business confidence remains extremely low The very small increase in the euro-zone Economic Sentiment Indicator in May adds to the evidence that the euro-zone economy bottomed out in April, but that activity is recovering only very slowly. While the …
The EC fiscal proposal confirms that Europe’s fiscal response will be large enough to help to ease concerns about how the current crisis will be financed. But the details are yet to be finalised, and the money will probably not start to flow until next …
27th May 2020
Policymakers have more work to do The account of April’s ECB meeting, published today, shows that the Governing Council has left the door wide open to further monetary policy support. As a reminder, at that meeting the Council made the Targeted …
22nd May 2020
Sweden faces some time out in the cold Norway, Denmark and Finland are reportedly considering keeping their borders with Sweden closed, even as and when they open them to others, because of the higher prevalence of Covid-19 infections there following its …
Economic activity in Denmark appears to have clawed back about one-third of its virus-related fall since the government started to ease restrictions in mid-April, with activity probably about 7.5% below ‘normal’ levels. At face value, the Danish …
21st May 2020
Activity still well below virus levels The partial rebound in the euro-zone Composite PMI in May suggests that the economy is now on a slow road to recovery. But even as lockdown measures are gradually lifted, the level of activity is likely to be well …
Slight improvement in confidence Consumer confidence rose slightly in May, suggesting that households are a little less depressed about their prospects and the wider economic outlook than they were in April. Nonetheless, the index remains very low and …
20th May 2020
Public debt ratios are set to rise sharply in all euro-zone countries this year but in most cases they should then start to fall again. The exceptions are Greece and, more importantly, Italy where we expect the debt burden to keep rising and potentially …
Food inflation the least of the ECB’s problems We suspect that harvesting and supply issues rather than stockpiling caused the increase in food inflation in April, and that these effects will persist in the summer. Nonetheless, with core inflation falling …
We think that the ECB could end this year owning 40% or more of the government bond markets in Italy, Spain and Greece. That would help to cap bond yields this year, but it could create serious legal and political challenges for the central bank further …
19th May 2020
The €500bn EU joint fiscal package suggested by France and Germany would be a significant move towards fiscal union. However, the benefit to the countries hit hardest by the coronavirus crisis, notably Italy, would probably be little more than 2% of GDP, …
