Weak growth is increasing the chances of new ECB stimulus (ABN-AMRO)

Aline Schuling and Nick Kouns of ABN AMRO point out that yesterday's SMI data indicates a persistent weakness in growth. They expect the ECB to further postpone its forecasts in terms of unchanged rates and ongoing reinvestments.

"Euro zone SMIs for April indicate that economic growth remained moderate at the beginning of the second quarter. Manufacturing PMI increased slightly (from 47.5 in March to 47.8 in April), while services PMI declined from 53.3 to 52.5.

At its current level, it indicates modest GDP growth, at a rate of around 0.1 to 0.2% quarter-on-quarter, which corresponds roughly to the growth of the second semester of 2018 and about half of the trend growth rate.

The PMI report seems in line with our baseline scenario, where growth will remain well below the trend of the first half of this year, with only a slight improvement in the second half of the year. The slowdown in economic growth since the beginning of 2018 has also left its mark on the labour market. The employment component of the composite PMI has been declining since September 2018 and (at 52.9 in April 2019) suggests modest employment growth and a more or less stable unemployment rate.

We believe that the ECB's forecasts for growth and inflation remain too high despite recent downgrades. Our baseline scenario is that the ECB's key interest rates will remain unchanged until the end of next year and reinvestments will continue until the end of 2021. Secondly, we believe that the ECB will announce relatively flexible conditions for the new TLTRO-III in June. Pricing will likely be similar to that of the TLTRO-II so that banks can borrow at rates as low as the deposit rate if they meet certain lending benchmarks.

If rate cuts are not possible, the ECB could revive what has been its main stimulus tool in recent years: the quantitative easing. Indeed, we believe that the probability of an QE-II has increased significantly, even if it is not our most likely scenario."