What’s this? Two major investment banks changing their economic forecasts for the eurozone hours away from the ECB’s landmark interest rate meeting?
JP Morgan and Merrill Lynch have both revised their expectations for eurozone GDP this year, now predicting a recovery in the second-half of 2009.
Here’s Merrill’s Holger Schmieding, to start with:Although hopes for an eventual recovery are still tentative, they are now much less tentative than they were in January. The valley of tears will apparently be deeper than we thought five months ago, when we were projecting a 2.5% decline in Eurozone GDP for 2009 as a whole. In early 2009, the economy probably contracted even faster than the 1.6% drop in GDP seen in the last quarter of 2008. However, the forecast that the worst would be over by Christmas stands firmer than before.
In addition, the chances that the Eurozone could start to recover in mid-2009 already have increased. As a result, we have recently made largely offsetting changes to the quarterly profile of our GDP projections. While we slashed our call for 1Q GDP from -1.7% to -2.0% qoq, we have raised our call for 3Q from -0.2% to +0.1% qoq. In other words, the recession may be even a little deeper than we thought upon publishing our last recovery checklist on 31 March, but it may also be a little shorter.
And JPM’s David Mackie:
We are making some changes to our Euro area growth forecast. Previously, we anticipated a significant contraction in the second and third quarters of this year, followed by stagnation in the final quarter. Now we expect a much more moderate contraction in the current quarter, followed by stagnation in the third quarter and a return to positive growth in the final quarter. In terms of the peak-to-trough move in the level of GDP, the new forecast anticipates a drop of 4.0%, compared with the 5.1% drop in the previous forecast. The new forecast has a shallower recession than the previous one, but it is still the deepest recession that the Euro area has experienced since 1950. At this stage we are not changing our inflation or ECB forecasts.
All of which adds further fodder to the (prevailing) theory that the ECB will shy away from announcing further unconvential policy measures at its meeting on Thursday, at which it’s already expected to cut rates 25bps to 1 per cent. The governing council still seems to have wildly diverging opinions on the prudence and technical feasibility of such policy measures. That, combined with conflicting indicators from their economic models, virtually guarantees that nothing dramatic will be announced at this meeting.
Related links:
Moment of truth – FT analysis
QE-fishing in the Eurozone – FT Alphaville