Draghi's Growth Streak Seen Tarnished in Friday Data Splurge

What Is the ECB's Next Move Going to Be?
  • Row of indicators to juxtapose muted prices with steady growth
  • GDP, inflation, unemployment data all released simultaneously

A suite of euro-area data on Friday will provide Mario Draghi with his first simultaneous dispatches from both fronts in his struggle to boost inflation -- showing how he still has a fight on his hands.

QuickTake Deflation

Gross domestic product numbers, in a newly accelerated publication just one month after the first quarter ended, will coincide with the usual end-of-the-month inflation statistics to present a snapshot of what the European Central Bank president still has to achieve. It’s likely to show the euro area has now completed a dozen quarters of consecutive growth -- though that momentum isn’t strong enough to produce faster price gains.

Euro-area inflation hasn’t hit its target since 2013, when the economy was contracting. But now that it’s expanding, weak global demand, cheap commodity costs and a lack of investment are weighing down prices. It’s a conundrum that Draghi hasn’t been able to solve, even after he’s cut interest rates to record lows, expanded bond purchases and started an additional loan program for banks.

“The big story on inflation is that it’s flat, and going nowhere in the short term,” said Anatoli Annenkov, senior economist at Societe Generale in London, adding that cheap oil is behind the restraint and prices should move up later in the year. “We don’t doubt that the ECB’s measures are helping -- they should have an impact on inflation and growth. The question is how big.”

The region’s inflation rate probably stayed at zero in April, based on a Bloomberg survey of economists. That’s far below policy maker’s near-2 percent goal. By contrast, first-quarter growth probably picked up to 0.4 percent from 0.3 percent in the previous quarter.

The growth data will come 15 days earlier than usual starting this week, as Eurostat tries to make figures on output more timely, which could help inform the ECB’s policy-making. The new release timing brings the region into line with the U.S. and U.K., which also publish first estimates within about a month of the end of the quarter.

In addition to the euro-wide number on April 29, Draghi will see growth readings from France and Spain, and unemployment for the entire region. Germany’s closely watched Ifo business confidence index unexpectedly fell to 106.6 in April from 106.7, data on Monday showed. The euro rose against the dollar for the first time in four days, advancing 0.3 percent to $1.1258 as of 12:10 p.m. London time.

Draghi has said that the inflation rate could drop below zero again in the coming months, keeping him on the lookout for risks of a spillover into wages and spending that could signal the start of a deflationary spiral.
 
Euro-area growth is seen reaching 1.4 percent this year, based on ECB forecasts. The year-over-year figure in the first quarter was 1.4 percent, economists expect the data on Friday to show.

Still, Draghi said last week that downside risks weigh on the outlook. He cited weakened global prospects, slow structural reforms and “subdued growth prospects in emerging markets.”

China remains a wild card for the euro area as it navigates an economic rebalancing, and growth is slowing elsewhere. In the U.K., a Bloomberg survey puts the pace of expansion at 0.4 percent in the first quarter, down from 0.6 percent in the last three months of 2015. The 0.6 percent annualized pace projected for the U.S. would compare with 1.4 percent in the previous quarter.

Political risks also loom: The U.K. will hold a June 23 referendum on whether to stay in the European Union, and current polls suggest it’ll be a close vote. A so-called Brexit could cause financial volatility that weakens the transmission of ECB policy. Elections in Spain and possible turmoil surrounding Greece could also upset markets.

Against that backdrop, the euro area’s services and factory sectors saw little change in activity in April, failing to respond meaningfully to the latest round of monetary stimulus. Markit said on April 22 that its composite Purchasing Managers Index slipped to 53 in April from 53.1 in March, with 50 the dividing line between growth and contraction.

When it comes to inflation, technical issues could remain a drag, Societe Generale’s Annenkov said. A drop in oil costs that continued into the start of this year has held back inflation on an annual basis, though the tide shows some sign of turning: Oil has moved up slightly this month.

If the restraints on inflation from external shocks and commodity prices abate and output growth holds steady, Draghi may see the ECB’s stimulus generate the price pickup he’s been awaiting -- but it may take time.

“We think measures deployed since mid-2014, including the March 2016 package, are well-targeted and should help to ease financial conditions, stimulate lending, and support demand,” economists Philippe Gudin and Antonio Garcia Pascual at Barclays in London said in a research note. “However, we do not think they will materially alter the near or even medium-term inflation outlook.”

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