European Central Bank policymakers struck a warily upbeat tone on the eurozone’s growth outlook in last month’s monetary policy meeting, as incoming data suggested the worst could be over for the bloc’s economy.
However, the meeting — the minutes of which were published on Thursday — came before the coronavirus outbreak created fresh headwinds for the global economic outlook.
Members of the governing council “broadly agreed” that incoming economic data and sentiment indicators “pointed to some stabilisation in euro area growth dynamics”, the ECB said in its account of January’s meeting.
Incoming data pointed to “continued positive but modest GDP growth”, policymakers said.
However, “some caution was also expressed about becoming too optimistic”, as concerns were raised about the external sector and the pace of the recovery of the single currency zone’s export-led manufacturing sector, the minutes noted.
The meeting was Christine Lagarde’s second as ECB president; the governing council left its policy rates unchanged and launched the central bank’s first strategic review in 16 years.
The coronavirus outbreak was at an early stage when the January 23 meeting was held, and its economic repercussions had not yet become clear. Despite this, policymakers noted that global trade “remained subdued, damped by a still high level of trade tensions and weak Asian demand”.
The signing of the phase-one trade deal between the US and China late last year helped boost business confidence, as did the greater clarity about the UK’s departure from the EU, which took place at the end of January.
But, the policymakers noted, “the tariffs imposed by both China and the United States had largely been left in place and that the trade deal could have adverse consequences for euro area exports as a result of trade diversion”.
Although manufacturing activity “had improved, it was still at a level which signalled a contraction”, according to the minutes of the meeting. In particular, “the automobile sector remained a concern” as “there were deeper structural factors affecting this industry that needed to be monitored closely”.
More generally, members of the ECB’s governing council recognised that while some sentiment indicators for the eurozone had improved, “the real economy remained weak and the improvement in hard data had been negligible”.
Domestic demand continued to be a driver of growth, aided by “robust income developments” thanks to a strong labour market and rising wages. In contrast “business investment dynamics remained weak”, with sectoral indicators suggesting “business investment would remain subdued in the short term”.
Overall, while some of the uncertainty surrounding international trade was receding, “the risks surrounding the euro area growth outlook — relating to geopolitical factors, protectionism and vulnerabilities in emerging markets — remained skewed to the downside” and “risks to the outlook were still elevated”, policymakers concluded.
Headline and underlying inflation had moved in line with the bank projections, but some policymakers argued that the level of underlying inflation “remained muted” and “the outlook for price developments remained below the governing council’s medium-term aim”.
Eurozone inflation has been below the ECB’s target of below, but close to, 2 per cent for most of the time since 2013, despite unprecedented stimulus in the form of negative interest rates, asset buying and ultra cheap loans to banks.
The ECB publishes an account of the governing council’s discussions four weeks after each monetary policy meeting; its next rate-setting gathering will take place on March 12.
“The minutes of the January meeting not only put the subtle, more optimistic changes into perspective, they also seem to be preparing market participants and the ECB itself for a more challenging March meeting,” said Carsten Brzeski, chief economist at the bank ING.
Source: Economy - ft.com
