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The positive expectations of German firms have only dimmed slightly in the wake of the Brexit June 23 referendum.
The positive expectations of German firms have only dimmed slightly in the wake of the Brexit June 23 referendum.

Eurozone Recovery On Track

Economists doubt the ECB has much firepower left after its so far unsuccessful attempts to bring inflation back to its target

Eurozone Recovery On Track

The outlook for the eurozone economy remains stable but lackluster, a Reuters poll showed, suggesting that for now, the main risks emanating from the UK's vote to leave the European Union are confined to British shores.
To cushion the blow from the June 23 Brexit vote, the Bank of England last week chopped interest rates to a record low and restarted its asset purchase program and is expected to ease further, putting pressure on the European Central Bank to follow suit with more easing.
But there is scant confidence amongst economists that the ECB has much firepower left after its so far unsuccessful attempts to bring inflation back to its target of close to 2%.
The ECB has spent many billions of euros in asset purchases—now €80 billion ($89.3 billion) per month—for over a year, has offered cheap long-term loans to boost lending and has chopped its deposit rate below zero, to -0.4%.
Still, the latest poll of over 60 economists showed inflation is forecast to average just 0.3% this year, 1.3% next, and is not expected to reach the ECB's target until 2019 at the earliest.
While those predictions are not very different from last month's poll, nor from inflation forecasts taken before the ECB began quantitative easing, the range of forecasts showed lower highs as well as lower lows. Growth projections were not very different either, with lower lows.

Losing Momentum
After a good start to the year, the eurozone economy lost momentum and gross domestic product growth is now expected to average 0.3% per quarter until early next year and then average 0.4% until the end of 2017.
"Our forecasts imply that the slack in the eurozone economy, which had started to erode, will persist for longer than we—and the ECB—had expected," wrote Paul Mortimer-Lee, global head of market economics at BNP Paribas, in a note.
"Rather than Brexit, this will be largely down to the fading of some of the temporary factors that boosted growth this year."
The poll showed the ECB would keep its negative deposit rate unchanged until end of 2017, with only a handful of economists expecting a further cut.
With pressure to ease policy further, the central bank is widely expected to extend its monthly asset purchases program to beyond its original plan of conducting them to March 2017.

No Derailment
ECB policy makers concluded at their July meeting that the UK’s vote to leave the European Union won’t derail the eurozone’s economic recovery, Germany’s Bundesbank said Monday.
The ECB’s 25-member governing council “came to the conclusion that the base scenario of a continuing economic recovery and gradually rising inflation rates in the eurozone is still intact,” the Bundesbank wrote in its monthly report.
The ECB left interest rates unchanged after its policy meeting on July 20-21 and ECB President Mario Draghi stopped short of promising fresh stimulus for the eurozone economy.
Draghi said it was too early to determine the economic fallout of the UK’s June 23 referendum on EU membership, and stressed that financial markets had shown “encouraging resilience.” He said the ECB would reassess the situation in September, when it will have fresh economic forecasts.
The Bank of England responded aggressively to a weakened outlook for the UK economy at its Aug. 3 policy meeting, cutting interest rates and launching a fresh bond-purchase program.
But the Bundesbank said the economic fallout of Brexit for Germany would likely “remain within narrow limits, at least in the short term.”
German economic growth should continue over the summer, the Bundesbank said, as the positive expectations of German firms have only dimmed slightly in the wake of the referendum despite intensive public debate about its economic impact.

 

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