Perspectives

The ECB opts for more monetary support: how effective will it be?

EcoPerspectives // 4th quarter 2019  
8
economic-research.bnpparibas.com  
Eurozone  
The ECB opts for more monetary support: how effective will it be?  
At its September monetary policy meeting, the European Central Bank delivered a strong message. Through the broad mobilisation of  
its unconventional monetary policy tools, it aims to fulfil its mandate and reach its inflation target. At the press conference following  
the meeting, Mario Draghi seized the occasion to reiterate his call on certain eurozone governments to increase their fiscal support.  
The ECB is entering a long period in which it will have to remain mute, passing on the baton to the member states with comfortable  
fiscal leeway. This new round of monetary support is welcome considering the economic troubles facing the eurozone, although  
there are some doubts about its effectiveness.  
Once again, the European Central Bank (ECB) has shown that it  
1
- Growth and inflation  
can be extremely proactive. Looking beyond discussions on the  
redefinition of monetary policy and its targets, Mario Draghi has  
acted in keeping with his mandate. The big debate is now focused  
on the effectiveness of the measures announced at the  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
2.7  
1
2 September monetary policy meeting and the adverse effects they  
might engender. Mr. Draghi again insisted on the need for greater  
fiscal support.  
1
.9  
1.9  
1.8  
1
.5  
1
.1  
1.1  
0
The ECB is preparing the groundwork for greater fiscal  
support  
.8  
0.7  
0
.0  
In view of the weakening economic outlook and the continued  
prominence of downside risks, governments with fiscal space  
should act in an effective and timely manner”. The ECB’s Governing  
Council is now unanimously calling for more expansionist fiscal  
policies in the countries with sufficient fiscal manoeuvring room.  
Henceforth, fiscal tools will have to be the main instrument for  
stimulating demand so that the normalisation of interest rates can  
get underway. In this respect, this new round of monetary easing  
continues to ensure particularly favourable financing conditions for  
fiscal policy. The ECB made some major announcements at its 12  
September meeting. Despite the reticence expressed by certain  
Governing Council members, the ECB and its President Mario  
Draghi decided to act quickly. A package of measures was  
announced that aims to fulfil its mandate and meet its inflation  
target:  
16  
17  
18  
19  
20  
16  
17  
18  
19  
20  
Source: National accounts, BNP Paribas  
2- Inflation and monetary policy  
Headline inflation (%) Core inflation (%)  
Monetary easing phases  
5
4
3
2
1
0
-
Forward guidance will be strengthened by ruling out any rate  
increases until inflation had “robustly” converged with its 2%  
target. The press release explicitly refers to the core inflation  
component;  
-1  
Source: ECB  
-
-
The conditions for targeted longer-term refinancing operations  
Reading the chart: the orange bars refer to certain monetary easing phases  
conducted by the ECB. They comprise both key rate cuts and increases in the ECB’s  
balance sheet.  
(
TLTRO) granted to eurozone banks will be improved by  
lowering rates and extending the maturity;  
The deposit rate applied to excess bank reserves will be  
reduced to -0.5% (from -0.4%) and a tiering system will be  
introduced. This system exempts part of bank reserves from  
negative interest rates in order to limit the negative impact on  
interest margins;  
Net securities purchases will be reactivated as part of  
Quantitative Easing (QE), with monthly purchases of  
EUR 20 bn starting in November 2019, for a duration as yet to  
be determined. These purchases will swell the ECB’s balance  
sheet again, which now accounts for about 40% of the  
eurozone’s GDP, thereby maintaining downward pressure on  
long-term rates in the eurozone.  
Unconventional monetary measures undertaken by the ECB since  
2
014 have had a positive macroeconomic effect. Without these  
1
measures, GDP growth and inflation would have been lower . The  
uncertainty currently straining the eurozone economy largely stems  
from external sources (see part 2). Under this environment, the  
effectiveness of the newly announced measures might be more  
limited than during previous phases of monetary easing.  
-
1
Speech by Philip R. Lane, Monetary policy and below-target inflation, Bank of  
Finland, July 2019  
EcoPerspectives // 4th quarter 2019  
9
economic-research.bnpparibas.com  
The ECB’s next President, Christine Lagarde, is generally expected  
to be in line with Mr. Draghi. During a recent speech to the  
European Parliament, the former head of the IMF underlined the  
importance of fiscal policy to counter the current slowdown. Ms.  
Lagarde also reiterated the need to deepen institutional cooperation  
within the eurozone, notably through the creation of a common fiscal  
tool.  
3
- Contribution to the growth of total value added (pp)  
Agriculture Industry (including manufacturing) Construction  
Services Total value added (in volume, %)  
1,0  
0,8  
0,6  
0,4  
0,2  
0,0  
The divergence of industry and services: an  
unprecedented situation?  
The current economic slowdown in the eurozone fits within a more  
global slowdown that can be seen in both the advanced economies  
and in the emerging markets. After a robust year in 2017, GDP  
growth in the eurozone seems to have faltered, slipping to an  
average of only 0.3% in the first half of 2019 (+0.2% in Q2 2019 and  
-
0,2  
0,4  
-
2013  
2014  
2015  
2016  
2017  
2018  
2019  
Source: Eurostat  
+0.4% in Q1). On the whole, private consumption -- the main growth  
engine in early 2019 -- has been resilient at a time of declining  
unemployment and dynamic wage growth. Investment has slowed,  
in part due to the high level of uncertainty. Despite a rather  
lacklustre international environment, foreign trade made a positive  
contribution to eurozone growth in the first half of 2019 after sharply  
curtailing activity in 2018.  
4- Spread between manufacturing PMI and services PMI  
Services PMI Manufacturing PMI  
Spread between Manufacturing PMI / Services PMI (RHS)  
65  
6
4
2
0
60  
For several months, the eurozone’s economic situation has been  
marked by a sharp divergence between the dynamics of the  
manufacturing and services sectors. Since early 2018,  
manufacturing industry has made a generally negative contribution  
to eurozone growth (see chart 3). Inversely, the services sector is  
still resilient, thanks to strong domestic demand bolstered by an  
improving job market situation. This divergence is confirmed in the  
most recent economic publications for the eurozone. The  
purchasing managers index (PMI), which is closely monitored by  
economic observers for its sector-by-sector report on the health of  
the economy, has declined sharply in the manufacturing sector  
since the end of 2017 (see chart 4), while the services sector has  
been resilient.  
55  
50  
45  
40  
35  
-
-
-
2
4
6
-8  
-10  
30  
00  
02  
04  
06  
08  
10  
12  
14  
16  
18  
Source: Markit  
Structurally, activity in the manufacturing sector is more sensitive to  
shocks, especially external ones. However, the current situation  
seems to be rather unusual with regard to the eurozone’s short  
history. Manufacturing PMI is particularly weak compared to the  
high score reported in the services sector. With the exception of  
How long can this situation last? How much longer will activity in the  
services sector withstand the troubles in the manufacturing sector?  
The key lies in the dynamics of domestic demand, and private  
consumption in particular. Consequently, we should keep a close  
eye on the job market situation in the short term.  
2
008-2009, this is the widest gap ever reported since the euro’s  
creation (see chart 4). This observation is especially true for the  
German economy, which has a bigger manufacturing sector and  
higher openness rate than its neighbouring countries. The absence  
of a rebound in world trade, confirmation of China’s economic  
slowdown and uncertainty generated by trade tensions and Brexit  
negotiations are straining external demand and the manufacturing  
sector in particular. Though its share is growing, the services sector  
2
still accounts for only about 20% of global exports .  
2
Speech by Benoît Cœuré, The rise of services and the transmission of monetary  
st  
policy, 21 Geneva Conference on the World Economy, May 2019  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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