The ECB will end its €2.6trn asset purchase programme this month, as expected. The central bank reiterated that its policy rates will stay at their present levels at least through the summer of 2019. But the exit from QE comes at a particularly difficult time. The pace of euro zone expansion has slowed meaningfully this year. Real GDP contracted in Germany and Italy last quarter. The risk of a technical recession is significant in both economies.
The euro zone could also come under greater competitive pressure as a result of yuan and EM FX depreciation and some weakness in the dollar. Any rise in the trade-weighted euro is particularly damaging for Italy because of its poor productivity. We have written before that the central bank’s growth projections looked optimistic. In the new staff forecasts released yesterday, the ECB revised down real GDP expectations for this year and next by 0.1pp to 1.9% and 1.7% respectively. The staff expects the 1.7% rate to be maintained in 2020, but growth to slow to 1.5% in 2021. We think there could be more downgrades to come.
A worsening global outlook put the squeeze on countries with high export ratios. The German and Italian economies struggled with growth at or below zero. The ECB was forced to downgrade growth expectations and resume an easing bias.