No major policy shift likely following German election

With the CDU/CSU and SDP having won very similar shares of the vote, the composition of Germany’s next government still hangs in the balance. An SDP-led coalition would probably pursue a slightly less restrictive fiscal policy, but any change of direction would be small.
Andrew Kenningham Chief Europe Economist
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European Economics Weekly

Rising Covid fears will keep policymakers dovish

It is too early to judge how serious the B.1.1.529 variant will turn out to be, but it certainly reinforces the case for central banks to be ultra-cautious when withdrawing their policy support. We now think that at its next meeting, the ECB will make clear that even if it intends to end net PEPP purchases in March, it stands ready to start them again if needed. That in turn should help to keep bond yields and spreads low. Meanwhile, we are braced for some “shock” inflation numbers next week, but they should mark the peak and inflation is likely to fall quite sharply next year.

26 November 2021

European Economics Update

PEPP not guaranteed to end in March

The account of October’s ECB meeting suggests that it is by no means guaranteed that net PEPP purchases will end in March. And even if they do, the Bank may well leave open the possibility of re-starting PEPP purchases later in 2022 if needed. Meanwhile, we agree with the ECB’s message that investors have got ahead of themselves by pricing in interest rates hikes for next year.

25 November 2021

European Data Response

German Ifo Survey (November)

The fall in the Ifo Business Climate Index (BCI) for November was in line with expectations and suggests that the German economy was struggling even before the recent tightening of Covid restrictions. Things will be much worse in December as coronavirus restrictions are tightened further.

24 November 2021

More from Andrew Kenningham

European Economics Update

ECB slows purchases but keeps policy ultra-loose

The ECB today confirmed that it will slow its asset purchases slightly but this is a long way from a “full taper”. We think inflation will drop even further than the ECB expects over the medium term and expect the Bank to continue with asset purchases of over €50bn per month until the end of next year. What next for the ECB? We’re hosting a post-mortem after Thursday’s Governing Council meeting at 1100 ET to discuss its decision and our views on the euro-zone’s economic and inflation outlook. Register here.

9 September 2021

European Data Response

German Industrial Production (July)

The small increase in German industrial production in July merely reversed the fall in June, and left output well below normal. While the rest of the economy is now close to a full recovery, supply chain problems among manufacturing companies will keep GDP below its pre-pandemic level until Q4 at the earliest.

7 September 2021

European Chart Book

Rise in inflation is not over

Headline inflation came in higher than our above-consensus forecast in August and, at 3.0%, reached its highest level for a decade. It is likely to rise a bit further in the coming months: producer price inflation has risen recently and the price components of surveys such as the PMIs show that price pressures are still strong. However, we think inflation will drop even further than the consensus and ECB expects over the next two years. This is largely because we expect wage inflation to remain low, given that there is more slack in the labour market than before the pandemic and that the Phillips curve is flat. Although there are some signs that the recovery is losing momentum, this is inevitable as activity gets close to its pre-pandemic level. Against this backdrop we think the ECB is likely to dial down its emergency asset purchases slightly on Thursday and end them completely next March, but continue with its standard asset purchase programme for several years and leave the deposit rate unchanged for the foreseeable future.

6 September 2021
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