As Barclays analysts commented on Wednesday (note that it was before Mario Draghi’s press conference):
We see four transmission channels, which are likely to positively impact the economy: 1) the depreciation of the euro (which boost exports competitiveness); 2) the re-anchoring of inflation expectations (which prevent real interest rates from increasing); 3) the reduction in nominal yields (due to a reinforced forward guidance effect and the portfolio squeeze effect of the purchases); and 4) the portfolio rebalancing effect (the spill-over to other asset classes, such as corporate bonds, loans and equities).
We think the exchange rate channel is likely to be the quickest to bear fruit, and probably has already started to have some impact. The depreciation of the euro started a year ago, when president Draghi pre-announced upcoming non-conventional measures, and has reached around 12.5% in real effective terms. Although the depreciation has been spread over the past year and despite some lag in the transmission to export competitiveness and then to actual export performance, we believe that the impact of a weaker euro is already at play and could eventually add up to 1pp to GDP.
However, the impact will vary across countries. According to a recent study by the European Commission, the real exchange rate elasticity of exports varies from -0.4 in Belgium and -0.8 in Germany to -1.4 in France, -1.6 in Spain and -2.6 in Italy. Of course, the final impact on growth also depends on the share of extra euro area exports in GDP and import content of exports. However, even when these are taken into account, Italy, and to a lesser extent Spain and France, seem to be the big winners from euro weakness, while the impact would be smaller for Germany.
The so-called “signalling effect” of QE has also been quite significant but materialised only after QE was actually announced on 22 January, as demonstrated by the stabilisation of inflation expectations, which had been falling consistently since last summer. Together with the bull flattening of the yield curve and the fall in risk premia on other asset classes, it has pushed real interest rates at which the economy gets financing down to historically low levels, and should eventually increase the profitability of investment projects. We have more doubts about the efficiency of the portfolio rebalancing channel, given the higher dependence on bank financing in Europe.
Overall, monetary and financial conditions have eased quite significantly and are likely to provide a significant boost to economic activity, suggesting that the ECB’s policy should be successful. Lower real interest rates and easier credit conditions should provide some support to spending by households and non-financial corporations while facilitating the continuation of the deleveraging process. Indeed, monthly monetary data published by the ECB suggest an ongoing improvement in lending to the private sector. In particular, lending to non-financial corporations is now on an upward trend, and the larger-than-expected take-up at the March TLTRO suggests a potentially brighter outlook for lending to the real economy in the coming quarters.