Here it is in full, from Jacques Cailloux and team at RBS:
Despite some early signs of a slightly firmer Q3 GDP (our GDP Tracker is at 0.2% q/q vs 0.1% q/q last month) on account of strong German industrial production (boosted by favourable working day effects), we are revising down again our economic forecasts thereafter and now expect a full blown recession. The September composite PMI fell to 49.2, its weakest since July 2009 (and first sub-50 reading since then too). At this level, the PMI is consistent with a 0.1% contraction in GDP on a 3m/3m basis and both forward looking elements of the survey and ongoing financial market developments imply further weakening ahead. The manufacturing PMI was 48.4 – the weakest since August 2009 – while the services PMI was 49.1 – the weakest since July 2009.
Corporate hiring intentions – previously one of the brighter spots for the euro area as a whole – have fallen for the past five months and were at their weakest for 9 months in August (although on a trend basis remain at historically high levels). With financial market developments spilling over into the real economy, a likely sizeable contraction in the industrial sector in Q4 (currently -2.0% q/q nonannualised on the basis of today’s data) and chances of a disorderly Greek default remaining elevated, we now expect euro area GDP to contract in both Q4 (-0.2% q/q) and Q1 (-0.4% q/q). We expect any recovery thereafter to remain extremely modest (0.1-0.2% q/q), as the need for fiscal austerity weighs on growth.
Although it’s also what RBS expect the European Central Bank to do about it – a 50bps rate cut, which they give a 60 per chance of taking place at the ECB’s October meeting.
Which is both Trichet’s last one and held in Berlin. Truly, the gods are fans of irony.
RBS out the governing council was already sounding a more dovish note in its September meeting, and the data flow has only got worse since then. They say there could well be at least five or six dissenters, but regardless:
If the ECB does not cut rates at the October meeting then we believe they will deliver a 50bp cut by the November meeting at the latest, and would not rule out the prospect of an inter-meeting cut in rates ahead of the 3rd November meeting.
And there may be the reappearance of some unconventional measures:
It is inconceivable that the ECB would stand by whilst euro area banks came under increased pressure and we think the ECB could also announce additional measures to support the system, such as resuming the Covered Bond Purchase Programme and additional LTROs (6m and/or 1yr). In our view a combination of covered bond purchases, longer LTROs and a 50bp cut would have the potential to restore some confidence in the system.
The counter argument to this expectation, they admit, is the ECB’s traditional lack of haste — but Cailloux and co believe the seriousness of the current situation will take precedence.
Though for some reason, FT Alphaville have the old Grand Old Duke of York nursery rhyme in their heads…
Additional reporting rhyming by Joseph Cotterill
Related links:
This is not normal ECB tightening – FT Alphaville (March)
This is really not normal ECB tightening – FT Alphaville (June)
The passive tightening of ECB policy – Macro Musings
ECB may act next month if data warrants – Coene – Bloomberg