The European Central Bank’s top officials lined up to express cautious confidence in the euro-area economy after a series of reports pointing to a surprisingly weak start to the year, while reiterating that they’ll move only slowly toward ending stimulus.
President Mario Draghi and three of his most-senior colleagues signaled on Monday that while inflation remains too low and a global trade spat poses a new threat, the upturn is still intact. The comments come just over two weeks before the Governing Council meets to discuss how and when it might end its bond-buying program.
Recent euro-area data have disappointed, with gauges for economic activity and retail sales missing economists’ estimates and investor confidence slipping. The slide has been particularly pronounced in Germany, the largest economy, where exports and industrial output both saw a sharp drop in February. The trend continued on Tuesday, with French manufacturing and Italian industrial production both posting unexpected declines.
“We expect the pace of economic expansion to remain strong in 2018,” Draghi said in the ECB’s annual report, while chief economist Peter Praet later said he sees no reason to change the official economic forecasts. Vice President Vitor Constancio, presenting the report to the European Parliament, said price pressures will rise gradually and officials must remain cautious not to “derail” those developments.
Economists have so far written off much of the slowdown as being caused by temporary factors. In March, prior to the release of recent data, the ECB raised its 2018 forecast for growth to 2.4 percent.
“In the first few months of this year we have seen a softening of a number of indicators, but they’re still fully in line with the good scenario that we have, so we don’t see reasons to change our assessment of our projections,” Praet said in Frankfurt. “We have to be careful because downside risks have increased, but in a context where risks remain broadly balanced.”
Executive Board member Benoit Coeure told France Info Radio on Monday that “we don’t have worries about euro-zone growth” because the bloc is simply stabilizing after last year’s acceleration, though he also acknowledged that there is “not enough” inflation. He said the ECB will soon begin discussions about what to do with its asset buyback program, which is set to continue until at least September and top 2.5 trillion euros ($3.1 trillion).
Praet and Coeure also warned that the threat of a global trade war is increasing the risk to growth. That was highlighted on Monday with China evaluating the potential impact of a gradual yuan depreciation in response to a trade spat with U.S. President Donald Trump.
While the ECB is confident in the outlook, Draghi reiterated that “patience was needed for inflationary pressures to build up, and that persistence was necessary in our monetary policy for inflation dynamics to become durable and self-sustained.”
Still, the impact of lower unemployment on price pressures isn’t so straightforward, and the annual report cited recent research that shows models measuring this relationship tend to overestimate inflation.
“While traditional models provide a good understanding of the drivers of inflation in the euro area, they do not fully capture the complexity of the current economic environment in generating inflation,” the report stated. “Nevertheless, economic slack is still relevant and, in the euro area, the rebound in economic activity is expected to drive underlying inflation gradually upwards.”
The central bank also criticized fiscal positions of some members of the euro area, saying several of them were still “sub-optimal.” Policy makers have often stressed that governments should use the window of opportunity provided by the ECB’s still-accommodative policy to improve their positions and implement structural reforms. The annual report states that the latter tend to occur during an adverse macroeconomic environment, rather than during periods of strength.