ECB preview: Holiday season

Incoming data since June unlikely to shift the ECB’s view

Since the last ECB meeting five weeks ago in June, only a limited amount of new economic data has become available, and this data is unlikely to have significantly changed the ECB's perspective on the economy and consequently its policy stance (see our data monitor at the end of the report for more details). The outlook moderated slightly due to the weaker-thanexpected euro area PMIs and industrial production figures. However, the higher-thanexpected core inflation rates likely counterbalance this in terms of the policy stance, and thus concerns on the pace of the inflationary progress to target are still present. With the resurgence of economic growth, we expect the ECB will use the flexibility to wait for additional data on inflation and, specifically, wage growth, productivity and profit data, as communicated by Lagarde and others, before altering its communication or policy stance. See our piece ECB Research - The profit, wage and productivity triangulation, 20 June 2024. Thus, the July meeting should be a stock taking meeting and consequently relatively uneventful for markets. Lagarde will most likely face questions on the recent spread widening of French bonds and the relation to its TPI, but we expect her to answer much in line with chief economist Lane who last week said that the recent French spread widening had been orderly.

Growth data give downside risks to the ECB’s June staff projections

June PMIs declined unexpectedly with the composite indicator falling to 50.8 from 52.5 in May, below expectations of 52.5. We believe the drop was likely a correction to the stronger than expected data in April and May and focus more on the last quarter as an average. In Q2 24, the composite PMI was significantly higher compared to Q1, indicating that the economy also grew in Q2. Yet, the decline in June releases (industrial production and retail sales) raises questions about the strength of growth and we see downside risks to the ECB’s June staff projections of 0.4% q/q GDP growth in Q2 and the following quarters this year. The Archilles heel of the growth outlooks is still the (German) manufacturing sector, which has now stabilised at low levels but is struggling to pick up growth. The weakness of the sector was highlighted by German industrial production, which fell 2.5% m/m in May due to a drop in machinery and car production.

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