The ECB will remain squarely focused on developments in inflation expectations and any other signs that might indicate a sustained increase in inflation. In the wake of the ECB’s QE programme and the latest stabilization of oil prices, short-term measures of inflation expectations (inflation swap 2y3y forwards) have moved up but longer-term measures (5y5y forwards) remain far below 2%.
In the April 2015 quarterly ECB bank lending survey released this week, euro area banks reported another net easing of credit conditions (our composite indicator for households and firms fell slightly from -4.3 to -4.4) and indicated that the ECB’s expanded asset purchase programme (APP or QE) has had a net easing impact on credit standards and especially credit terms and conditions. The negative news in the mostly upbeat assessment of the latest survey was that the net balance of banks reporting increased loan demand from non-financial firms (NFCs) fell back significantly from 18 to 6 due to lesser financing needs for fixed investment. In Germany, Italy, and the Netherlands, NFC loan demand was flat while it shrunk in France. Only in Spain did banks report strong loan demand from NFCs where credit standards remain relatively tight and might still pose a binding constraint for a fair number of NFCs.
The latest industrial production data indicate robust momentum so far in Q1 and together with other indicators of economic activity (especially the surging retail sales) imply a strong GDP growth print for Q1 (our forecast remains 0.5% q/q). Business surveys also imply solid activity in coming months but actual factory order flow in Germany suggests that the growth slowdown in the US and several large emerging markets (especially China) may soon take its toll also on the euro area’s economy.