Jasper Juinen/Bloomberg News
July 20, 2016 7:42 a.m. ET
“Wait and see” seems to be the mantra for many central banks right now. It should certainly apply to the European Central Bank at Thursday’s monetary-policy meeting.
The shock of Brexit is still percolating, and no hard data on the eurozone economic impact is available. Surveys have shown a mixed picture. The ZEW survey of investors showed a big drop in sentiment concerning the outlook for both Germany and the eurozone, with expectations for the former reaching their lowest since November 2012. But the ECB’s bank lending survey, where some of the responses were collected after the vote, showed little impact on conditions for loan supply and demand.
Nevertheless, growth expectations are slipping. The International Monetary Fund Tuesday cut its 2017 growth forecast for the eurozone to 1.4% from 1.6%.
And data from the period before the U.K. referendum shows that the eurozone economy, after a strong first quarter, appears to have moved down a gear. The Markit composite purchasing managers index, while remaining well above the 50 mark that separates expansion from contraction, has flatlined in the second quarter. Industrial production has slowed, with May recording a 1.2% decline on the month. Inflation has continued to meander sideways, with June showing a headline reading of 0.1% and a core rate—excluding food, energy, alcohol and tobacco—of 0.9%.
Perhaps reassuringly for the ECB, financial markets, while volatile at times, haven’t panicked. Sovereign bond yields have fallen since the U.K. vote; the gap between 10-year Italian and German yields, at 1.25 percentage point, has narrowed after initially widening. The euro has been mostly stable. Equity indexes like France’s CAC 40 and Germany’s DAX have rallied, although bank stocks remain in the doldrums. There are worries about Italy’s banks in particular—but the answer here doesn’t lie with monetary policy.
The likely upshot is that the eurozone economy continues to expand, but hopes that it would gain vigor are gone. That implies a longer period in which domestic inflationary pressures are weak. But this is largely the same risk that has plagued policy makers for some time, not a new development. Weak growth increasingly needs to be addressed by politicians, not central bankers.
With the ECB having only just unveiled an expanded bond-purchase package in March, it looks like the important thing Thursday will be what President Mario Draghi says, rather than what he does.
Write to Richard Barley at [email protected]