March 04, 2015


Are we really discussing QE tapering already?

Ask yourself the following question: If the ECB had not decided to do QE in January, would they have done it at this monetary policy meeting this week? With all those data out purporting to show that the economy is strongly recovering, when even headline inflation rates, though still negative, are rising? This is a hypothetical of course, but what is becoming clearer is that QE will probably not be extended beyond September 2016. We are not even sure that the eurosystem will reach the targeted headline total of assset purchases, given the supply conditions on the bond markets.

What we had not quite anticipated is that news reports would already start discussing tapering well before the programme even starts. But here it is. We noted this report from Bloomberg, which says that we should soon expect a debate on when to end QE. The article said any extension of QE beyond the initial plan is an unlikely outcome because inflation rates will have recovered by then. This is, of course, trivially true because the oil price decline will have fallen out of the inflation index by late this year when headline inflation rates are certain to turn positive again. This is why we at Eurointelligence have been focusing on core inflation measure, which has been very stable and nowhere near deflation territory, but which have been consistently weakening - now at +0.6%.

The recent fall in the oil price (now partly reversed) has given a lot of spending power to consumers. Germany's federal statistics office reported yesterday that consumer spending rose 5.3% yoy in January and 2.9% mom. The explanation for this is simple. The falling oil price has increased real incomes temporarily - in Germany they are now up over 3% - and (very old) economic theory would tell you that consumers spend this income. It is also clear that real incomes will fall again once the oil price decline drops out of the inflation indices later this year. 

What we are observing are the economic effects of the oil price decline, which forecasters put at 0.5-1% of GDP. Whether we have an economic recovery worthy of its name cannot be seen in those numbers, but will only become clear after the oil price effects dissipate. The price for Brent has already risen back to $60, which is still low compared to last year, but the relative yoy decline is now not nearly as extreme as it appeared over the winter. 

Frankfurter Allgemeine notes that the economic recovery - at least in Germany - is fairly robust, lifting the entire economy. The phase of weakness, which started last summer, is now definitely behind us. Various banks have adjusted their 2015 forecasts - 2.1% Allianz, 2% Deutsche Bank - more in 2016. The article quotes Holger Schmieding as saying that the German economy was back at its ordinary speed limit. Two known sources of a potential setback would be Grexit and any renewed flare-up of the Russian war in Ukraine.

The improvement in Germany is mirrored in other parts of the eurozone - with a string of positive data from Spain, Portugal and Ireland. Italy's statistics institute Istat also recently produced a moderately optimistic outlook, with a return to growth this quarter, and more growth expected thereafter. 

Frankfurter Allgemeine has an interesting article about the supply of government bonds. The EBA has told banks that they need another €20bn by October to build a liquidity buffer. To reach the 2019 target, another €114.6bn are needed. That buffer requires risk-free government securities - exactly the same the ECB is going to buy as part of its asset purchase programme. 

Our other stories

We also have stories on Greece's reform proposals for Monday, the legal issues for Austria's bad bank, the Spanish economy, the fight to be the Spanish anti-establishment party, and commentary from the new radical left

Eurointelligence Professional Edition

For premium access, please log in or register 
for a free 14 day trial for the Eurointelligence Professional edition. The best independent intelligence on the eurozone anywhere in a fast and easy to read format.

A message from Wolfgang Münchau

Welcome to the homepage.

Since 2006 we have been providing our readers from central banks, European and international institutions and the financial sector with our daily morning newsbriefing, each morning, at 9am CET, Mondays to Fridays. We are independent from governments and institutions, so you get our honest, sharp and frequently humorous take on the news and the debate. The subjects we are currently focusing on are the now clearly visible economic slowdown, the sustainability of the Italian debt, whether the economic recovery in Spain is for real and our assessment of the impact of the geopolitical tensions in Eastern Europe in particular. Naturally we also follow the ECB and the European institutions as they work through the crisis.

You might ask, is the eurozone still important, since the acute phase of the crisis is over for now? Unfortunately, few of the problems have been resolved. This is something you will quickly notice once you start reading the briefing on a daily basis: there is no better and quicker way to keep yourself ahead of events in the eurozone.

I would like to invite you to register for a free 14-day trial, without commitment, so you can judge for yourself.

Wolfgang Münchau
Director Eurointelligence