Eurozone growth to fuel debate on timing of rate rise

By Balazs Koranyi

The US and eurozone economies remain a world apart and growth data due in the coming days will only highlight the widening gap, suggesting that monetary policy will continue to move in opposing directions on the two sides of the Atlantic.

US growth likely surged in the second quarter on healthy foreign trade and consumption, while the eurozone’s recovery probably lost a bit more steam, underlining the diverging fortunes of the world’s two biggest economic blocs.

Indeed, meeting next Thursday in the middle of the summer lull, the ECB is expected to point to ample and potentially growing risks to the outlook, which could weigh further on sentiment and suggest that any further removal of stimulus would come in the smallest of increments.

While the bank agreed last month to end its landmark bond purchase scheme by the close of the year, the dovish undertone of that decision pushed out rate increase expectations almost to the end of next year.

Supporting the ECB’s caution, a key consumer confidence indicator due on Monday is expected to dip further while the Purchasing Managers’ Index figures due a day later are also seen pointing to more softening.

“The jury is still out on whether the eurozone only went through a soft patch in the first months of the year or is actually already in the middle of a protracted cooling,” ING economist Carsten Brzeski said.

“Increasing trade tensions and growing geopolitical uncertainty could further undermine sentiment in the eurozone,” said Brzeski.

The IMF, writing in its regular review of the bloc, even warned earlier this week that risks to the outlook were “particularly serious”, increasing the chance of a hard landing as Brexit and reform complacency by eurozone governments were adding to risks.

Still, the ECB is likely to argue that growth indicators point to some stabilisation, keeping the bloc on track for an expansion that is well below its peak rate just a few months ago but still above what is considered its potential.

The bank could also harden up its language on ending asset buys this year to signal that there would be no going back on the decision, but the dovish tone of the guidance on the first rate rise is all but certain to remain.

Meanwhile, US growth is seen having surged to a four-year high of 4% in the second quarter, twice the first quarter’s rate, with analysts seeing an upside risk to the consensus.

Although US GDP figures tend to swing wildly, the data point to healthy growth.

Reuters

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