Eurozone: Tensions mounting – Nomura

Analysts at Nomura suggest that these past few weeks have not been easy for Eurozone because of underwhelming growth data, underwhelming inflation data, higher oil prices, simmering trade tensions, heightened angst about some emerging economies and – to cap it all off – growing investor alarm about political and economic stability in Italy (as well as Spain).

Key Quotes

“Many of these factors – and those European political issues in particular ‒ were not part of our original script. And as such we have had to rethink our economic and ECB policy outlook. More specifically, we have made the following changes to our outlook:

• We have lowered our GDP growth forecast for 2018 to 2.1% from 2.4%. Our forecast for 2019 has been lowered to 1.8% from 2.0%.
• We now expect the ECB to announce a three-month wind-down of its asset purchase programme from October through to December 2018 at the July meeting. We had previously expected a shorter two-month wind-down. More significantly, we now expect the lift-off in policy rates to commence in September 2019. We had previously assumed that this would occur next March. We think it more probable too that recent financial instability and slower growth could encourage the ECB to become more explicit in its forward guidance, possibly by suggesting what it means by its current statement that interest rate hikes will not emerge until “well past the horizon of the net asset purchases”.”

“These changes to our view are importantly conditional on some reversal of the trend toward financial instability that has gripped Italy in recent days and which threatens to grip other European economies in the coming weeks. And at present there are no clear catalysts that might generate that reversal. That obviously means that the risks to our economic outlook are tilted to the downside. By extension, it means the ECB may well postpone even further its plans for policy normalisation and possibly even contemplate putting them into reverse.”