BofAML _ La importancia de ser autosuficiente

Redacción - Viernes, 20 de Enero

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Europe Economic Weekly: The importance of being self-sustained • Draghi stuck to the Dec-line. "Self sustained", not "transient" inflation is wanted. Still, things may complicate this spring
•   Self-sustained inflation needs domestic growth and external demand. But a US fiscal push and strong USD can hurt exports.
•   UK: PM May largely confirmed our base case. It looks like a hard Brexit.

 

With the New Year we warned against the risk that a twin hump on real economy and inflation data is misconstrued by the ECB as a robust recovery which would get them into an early exit from the December stance. Still, we thought Mario Draghi would avoid this trap, in spite of massive pressure from core countries. We were reassured by the ECB press conference. Talks of exit strategies are dismissed as "high class issues". The message on inflation is dovish. Core is clearly what they look at, and convergence towards the ECB's target will have to be "self-sustained".

 

Still, while Draghi could probably easily find a majority in the Governing Council in favour of some "peace and quiet" so early after the momentous decision of 8 December, we think that the hawks will not disarm. In our opinion the June meeting could be crucial. Then, new forecasts will be coming on the back of a peak in headline inflation - which we think will come in April/May. Core can be erratic around Easter and there is an upside risk in the spring to our subdued core inflation projections. Even if we think that in June again Draghi will be able to avoid reducing the pace of buying further this year, we think that a lot of "hawkish noises" will rattle the market. In any case, we think some permanent damage was done to the "Draghi put" in December. The discussion for 2018 is likely to focus on the pace of tapering. That can be delayed, but probably not avoided.

 

We think Draghi is right to still highlight the downside risks. In this weekly we take a hard look at what the combination of a strong dollar and looming fiscal push in the US means for us. Our model suggests that a strong dollar often triggers a deterioration in world demand. A 6% appreciation in the dollar trade-weighted exchange rate would be enough to offset the benefit of a 1% acceleration in US demand for the world economy.

 

The domestic picture is not all rosy either. True, our tracker suggests that GDP growth would stand at around 2% annualized in Q4 2016-Q1 2017, but pockets of weakness remain. The latest ECB's bank lending survey has revealed the first tightening in credit standards since Q1 2014. This should warn against counting on too much support from banks this year. Draghi said last fall that the ECB should not "drop its guard". Indeed.

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