But, over the course of 2015, improving external conditions, easy monetary policy and the weaker EUR, more accommodative fiscal policy, low inflation and depressed oil prices should increasingly support growth. Yet, if the Eurozone wants to leave its troubles behind on a more consistent basis, it needs to lift its growth potential – and for that nothing short of unpopular structural reforms will be needed.
Events in Russia and the elections in Greece will require attention over the holiday period. Early next year, a focus will be the December inflation data (out 7 January), which might determine whether the ECB will trigger sovereign QE on 5 March (our base case) or on 22 January. A policy initiative we will hear a lot more about in 2015 is the EU Capital Markets Union.
2014 has not gone according to plan when it comes to growth. A year ago, we expected Eurozone GDP to expand by 1.1% this year, but now a growth rate of 0.8% (perhaps 0.9%) looks more likely. The chief culprits are the three biggest Eurozone economies: Germany, where corporate confidence was hit by events in Ukraine, and France and Italy, where sentiment has remained weak, arguably also due to uncertainty over the reform outlook. In contrast, the economic performance of Spain and Ireland in particular, but also Greece and Portugal, has been better than expected.
The ECB has had a busy year. In light of sluggish growth and declining inflation, aggravated by falling oil prices, the ECB eased its monetary policy stance substantially, making use of conventional, but also increasingly unconventional tools. Key highlights were the move to negative deposit rates and the new Targeted Longer-Term Refinance Operations (TLTRO) announced in June, and the new ABS and Covered Bond purchase programme in September. In December, the ECB hinted strongly that it will widen its asset purchases, likely including sovereign bonds, in early 2015.
With the start of the Single Supervisory Mechanism (SSM) on 4 November, the ECB became the dominant Eurozone banking regulator. In the run-up, the ECB conducted an asset quality review (AQR) and stress test of the 130 largest Eurozone banks, results of which were released in late October. Many banks had already raised capital before, but those that failed the test will have up to nine months to bring their capitalisation to the required level. As such, the ECB has made good progress in repairing the European banking system – although credit growth is likely to catch up only gradually, as demand will likely be slow to recover.