ECB Insight: Updated Staff Projections May Be Next Week’s Major News, Absent Big Decisions

3 September 2021

By David Barwick – FRANKFURT (Econostream) – With the European Central Bank Governing Council potentially to refrain from making big decisions next week despite the quantitative underpinning of new staff macroeconomic forecasts, the updated outlook for growth and inflation may itself be the major news to emerge from the monetary policy meeting.

Given the quarterly rhythm of forecast revisions, whatever the ECB predicts next Thursday, the projections may yet have to serve as the basis for important steps, if these are taken before the subsequent forecast exercise in December. The quantitative assessment of how prospects are shaping up as the euro area apparently emerges from the pandemic crisis could thus wind up being an early indicator of possible decisions.

Looking at public comments made by policymakers in recent days, upside revisions to the June forecasts on September 9 seem likely at least for growth. Perhaps the best evidence in favour of such a thesis was furnished by ECB Vice President Luis de Guindos, who made no attempt to conceal his optimism.

‘The economy is performing better in 2021 than we expected, and this will be reflected in the projections that will be published in the coming days’, he told a Spanish periodical in comments published Tuesday. ‘The leading indicators are positive, and in the coming days we will see the actual figures.’

De Guindos confirmed, as highlighted by Econostream previously, that Delta was less of a factor than monetary authorities had initially feared: ‘The main uncertainty was the impact the Delta variant would have’, he said. ‘What we are seeing is that it is not having as great an impact as we projected four months ago. This is mainly because governments have responded with fewer restrictions on economic activity than we had anticipated.’

Though less enthusiastic than de Guindos, ECB Chief Economist Philip Lane – who should have a clearer picture of forecast revisions earlier than anyone else on the Council - seemed on balance to lean in the direction of probably mild upside corrections.

In an interview with Reuters last week, he called it ‘significant that second quarter GDP came in well ahead of our June projections’. Though there was ‘probably some counterbalance to that good second quarter’, he sounded far from alarmed about the specifics: ‘more extensive bottlenecks, maybe some slowdown in the world economy and maybe some risk of the Delta variant.’

‘If you put all of that together -- the fact that the second quarter came in above what we expected and what the third and fourth quarters might look like -- I would say we’re broadly not too far away from what we expected in June for the full year’, he summarised things. ‘It’s a reasonably well-balanced picture.’

Other Executive Board members have not recently addressed possible staff forecast revisions explicitly, but have nonetheless shared views of the outlook that have been positive.

For example, Isabel Schnabel in a German magazine interview two weeks ago: ‘We continue to expect to see a strong recovery. Given the high level of vaccinations, another hard lockdown is unlikely, despite the current rise in incidence rates.’

And in an interview published just Tuesday, ECB President Christine Lagarde sounded downright uncharacteristically optimistic: ‘We are emerging from this pandemic, with economies that are stabilized, with, in a way, little sustained disruption. When you look at the unemployment levels in advanced economies, not much damage has remained from the pandemic. When you look at the level of GDP, the size of our economies, we will be back to where we were pre-pandemic at the end of the year.’

At the level of the national central banks, there has also been little negativity with respect to economic growth. In a recent speech, Banque de France Governor François Villeroy de Galhau said that given somewhat better-than-expected growth in the first half of the year, ‘we still firmly believe in cumulative growth of 10% over 2021-2022, for France as well as for the Eurozone.’

In the context of the French economy, ‘[t]he effect of the Delta variant would only be indirect, through the lower growth of Asia and indeed the United States’, he said.

His German counterpart, Bundesbank President Jens Weidmann, sounded a cautionary note however about growth in the euro area's largest economy. Although 3Q would be even better than 2Q, worsening supply constraints meant that full-year 2021 growth ‘could be somewhat lower on average than expected in our June forecast', he said.

While more rapid economic expansion might also normally be expected to underpin more robust price developments, top ECB brass have been relatively muted about the possibility of a significant, let alone fundamental change in the inflation outlook as of next week.

‘[W]e are more worried about the inflation rate being too low in the medium term rather than too high’, Schnabel said in her interview.

Still, it is noteworthy that both Villeroy and Weidmann have been, even by the latter’s standards, relatively hawkish of late when it comes to inflation. Villeroy saw ‘progress towards our inflation target’, whilst Weidmann affirmed that ‘the upside risks currently outweigh the downside risks.’

Such comments do not however necessarily imply that forecasts stand to be revised upwards. In this regard, a colleague of theirs who spoke to Econostream on background was considerably more explicit in arguing that the official inflation outlook was due for a clear boost in the wake of the ECB’s new strategy and correspondingly revised forward guidance.

‘My personal view is that with the current macro outlook, with the US fiscal stimulus, with the EU fiscal stimulus, [the 2023 HICP projection of] 1.4% seems to be very low’, this person said. ‘I would be surprised if in the next forecast we would have inflation at that level. I think that it needs to be significantly higher.’

Yet another person close to ECB decision-making said merely that June forecasts were ‘largely holding up’, adding that ‘some of the outcomes are a bit more on the upside than others.’

Like many other European monetary policymakers on the subject of the inflation outlook, a third person who spoke to Econostream was decidedly reserved. Although price increases were visible ‘in some specific areas, if we don’t see them being passed on to wages, it’s hard to see sustained inflation’, he said. ‘And the wage increases, they still have not been that great. We’ve seen the Phillips curve is still alive … and I just think that we need to see persistent wage increases before we see sustained increases in prices.’

The absence of such second-round effects has undoubtedly played a role in successive staff forecast updates this year that have seen growth projections repeatedly boosted even as 2023 inflation was stubbornly unchanged at 1.4%.

It seems a bit harder to imagine that this will be the case this time around.

In any event, policymakers of all stripes consistently express confidence that the macroeconomic forecast exercise is done with maximum scientific rigour and in scrupulous independence of possible policy preferences elsewhere in the Eurotower.