Global Inflation Break Evens, ECB and Europe

With sluggish summer growth and weak core inflation at just 0.8% in October, the ECB again looks more likely to extend QE in December.

GDP grew at a modest pace of 0.3% QoQ in 3Q16, just like it did in 2Q. This was in line with expectations as Brexit and other political developments caused large economic uncertainty. While post-Brexit economic activity has not come to a halt in the Eurozone, somewhat of a wait-and-see attitude showed from economic surveys over the summer months with businesses and consumers. This has likely caused investment growth to be subdued. The decline in business confidence also came with more cautious hiring, which caused the unemployment rate to stagnate in 3Q. This, together with the higher oil prices has likely also impacted consumption growth. The French data, which already provides a breakdown, shows that consumption indeed stagnated for the second quarter in a row in 3Q. GDP grew by 0.2% overall in France, while Spain saw growth of 0.7%. The higher oil price did cause the Eurozone inflation rate to increase again, from 0.4% in September to 0.5% in October. With the fading out of the negative energy price effect on the inflation rate, the headline number is climbing, but the core inflation rate has yet to move. While the Eurozone economic surveys are now indicating increasing price pressures, they have yet to prevail in the core inflation rate. Price growth of services and non-energy industrial goods was stable at 1.1% and 0.3%, respectively.

This puts the ECB in a difficult spot. The increasing headline inflation rate and strong October surveys about the Eurozone economy indicate that the window of opportunity for extending QE – at the current or maybe even slower pace – is closing, but the ECB will be less than satisfied with core inflation holding steady below 1%. We already liked the December meeting for the announcement of further action and if the current trend of higher inflation and improving economic indicators persists, it will become very difficult for the ECB to wait longer than that.