The ECB ends QE despite a slowing Eurozone economy

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest ECB decisions, with the Commission’s latest forecasts:

  • The ECB left its interest rates unchanged at its 13 December monetary policy meeting, whilst confirming the end of net purchases under the asset purchase programme (APP) (QE).
  • ECB President Mario Draghi conceded some recent economic weakening, but said he expected the “strength of domestic demand” would continue to “underpin the euro area expansion”.
  • The ECB’s December forecasts suggested the Eurozone’s growth would ease from 1.9% in 2018, to 1.7% in 2019 and 2020 and to 1.5% in 2021.
  • The Commission’s November forecasts were broadly in line with the ECB’s, though a tad firmer, showing 1.9% growth in 2019 and 1.7% growth in 2020.
  • The Commission’s forecasts continued to highlight the enormous disparities within the Eurozone in terms of GDP growth, unemployment, the current account balances, budget deficits and government debt. In 2019, for example, the debt/GDP ratio is expected to be under 60% for Germany, but over 130% for Italy and 175% for Greece.

In addition:

  • The latest UK economic data confirm growth slowdown in 2018Q4, though the labour market remains firm and the annual growth of earnings is picking up.
  • The MPC’s next decisions are due on 20 December. No change in policy is expected.
  • In the USA, the Fed is still expected, on balance, to raise the fed funds target rate by 0.25% to 2.25-2.5% at its 18-19 December meeting.

Brexit developments included:

  • The Commons “meaningful vote” on the Withdrawal Agreement, expected for 11 December, was postponed. It is now expected to be held between 7 and 21 January 2019.
  • The ECJ announced that the UK was “free to unilaterally revoke the notification of its intention to withdraw from the EU” on 10 December 2018.

Ruth Lea said, “The ECB’s decision to end QE comes at a time when there are signs the Eurozone economy is slowing. However, if the ECB felt the need for further monetary stimulation, it could well resume QE. The rock bottom interest rates give virtually no room for lower interest rates.”

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

Tel: 020 8346 3482
Mobile: 07800 608 674
Email: ruthlea@arbuthnot.co.uk

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