November 18, 2016 / 7:40 AM / 3 years ago

Euro zone economy to hum at modest pace; ECB to extend QE: Reuters poll

Nov 18 (Reuters) - Euro zone economic growth will hum along at a modest pace over the coming year, according to economists in a Reuters poll whose views have barely changed since the U.S. election and five months after Britain voted to exit the European Union.

A man walks past driver cabins in the truck production plant of German truck and bus maker MAN AG in Munich, Germany, July 30, 2015. REUTERS/Michaela Rehle/File Photo

Despite what appears to be a strong likelihood for a U.S. interest rate rise next month, the European Central Bank looks set to keep going the other way, announcing an extension to its quantitative easing programme beyond March 2017. ECILT/US

Following the shock from the Brexit vote, which hasn’t hit either UK or euro zone growth yet in a material way, it appears that political uncertainty will continue holding back the euro zone from making any more progress on growth.

Italy holds a referendum on constitutional reforms less than a week before the ECB’s policy meeting next month and there is a packed calendar next year with national elections scheduled in Germany, France and the Netherlands. (Full Story)

“The recent sequence of anti-establishment votes has brought upcoming political events in the euro area into sharper relief. With this in mind, and with both economic growth and consumer price inflation still tepid, we expect the ECB to delay and pray when it meets next month,” Florian Baier, economist at Fathom Financial Consulting, wrote in a note.

Minutes from the ECB’s last month meeting released on Thursday showed policymakers suggested that December would be a key month for the future course of policy. There was also evidence of concern about weaker wage growth, suggesting further easing is likely. (Full Story)

Over 80 percent of the economists in the Reuters poll who had a view on what the ECB would probably do in December picked an extension to the QE programme beyond the originally-planned end in March 2017 as the most likely option.

Some of those economists suggested the central bank would need to make technical adjustments to its quantitative easing programme to widen the universe of eligible bonds it can buy.

A few respondents said the ECB could expand its monthly QE amount from the current 80 billion euros or change the composition of assets it buys. Only one forecaster said the ECB would make no further changes to policy.

The continued focus on monetary stimulus runs against growing calls for a fiscal response to economic trouble.

Britain is likely to rely on fiscal policy in the future, according to a separate Reuters poll, which also concluded decisively that the Bank of England won’t cut interest rates or increase the size of its asset purchase programme again any time soon. ECILT/GB

This week, the European Commission called for modest fiscal easing in the euro zone. But it would be difficult to achieve politically as Germany, which is running a surplus but has committed itself to fiscal austerity, is the only country in a position to make a difference. (Full Story)

The latest poll of over 60 economists showed the currency bloc will maintain its current 0.3 percent quarterly growth pace for the third and fourth quarter this year, after a surprisingly robust start to the year. That is unchanged from the October poll.

But over three-quarters of the respondents who answered an extra question said the risks to their growth forecasts were skewed more to the downside and gave a 15 percent probability of a recession over the coming year, up from a 10 percent chance given last month.

The outlook for inflation remained weak, too. Inflation, likely to average 0.2 percent this year, will only manage 1.3 percent in 2017, well short of the ECB’s close to 2 percent target.

In the sample of over 50 respondents, not a single forecaster pegged inflation at 2 percent over the coming year.

(For other stories from the poll: (Full Story))

Polling by Hari Kishan and Kailash Bhatija; Editing by Ross Finley//Mark Heinrich

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