Being ECB President Mario Draghi these days may not be as easy as in previous years. The monetary policy blueprint has been laid out years ahead ever since the crisis started and we are now approaching a focal time when markets firmly expect the end of APP. At the same time, growth dynamics are moderating, the economy is hitting capacity constraints, inflation is disappointing and a new (potentially) unknown factor in Italy makes Draghi's job more challenging. We outline some of the current challenges below.
Weaker data - growth/capacity constraints
Data has been surprisingly week in the euro area over the past two months. The surprise index is still close to its (negative) two standard deviations level. We see increasing arguments for why the recent moderation is more than just a temporary factor and, as such, more-permanent factors are at play, in particular capacity constraints such as a shortage of skilled labour supply. Different surveys at a European level show that up to 70% of companies point to a skilled labour shortage as the main restraint to growth.
Both hard and soft indicators have declined. In particular, the important PMIs (composite) have declined consecutively for four months now to stand at 54.1 in May. While the soft landing from the very high PMI levels late in 2017 was expected, our MacroScope model points to further moderation in the late summer/early in Q4. The model points to PMIs printing in the 54 area during the summer period and settling slightly lower around 53 towards the end of the year. Overall, we still expect euro area growth this year to be around 2%, somewhat lower than pointed to by the ECB's staff projections in March.
As already discussed in our ECB Preview - Not on Draghi's watch , 20 April, we expect the ECB to revise down its growth forecast in June, on the back of the moderation in data. In March, the ECB's governing council termed growth to be 'strong'. However, in April, it struck a slightly more gloomy tone of growth being 'solid' (which was also used in January's introductory statement). Given that euro area Q1 GDP came in at 0.4% q/q while the ECB assumed 0.7% q/q in its March staff projection, the lower Q1 print suggests a marked downward revision of the 2018 growth estimate to c.2.2% to come in June (2.4% in March).
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