Via Goldman Sachs,
One risk factor for the economic outlook is the exchange rate. The trade-weighted Euro has appreciated by 2.5% since the beginning of this year and by almost 5% since the announcement of the OMT in September.
To be sure, this appreciation comes after a significant weakening of the Euro in the preceding 12 months on the back of rising concerns about the stability of the Euro area, and the Euro TWI is still more than 1% below its average since 2008.
Moreover, export expectations are improving on the back of the pick-up in the global industrial cycle despite the appreciation of the Euro. The index of ‘new exports orders’ in the PMI survey, for example, rose to a level of 48.8 in January after reaching a trough of 44.7 in September. Thus, there is so far no indication that the exchange is putting the ‘gradual recovery’ scenario at risk.
When asked about the exchange rate in the January press conference, President Draghi said that “… the exchange rate is certainly a very important element as far as growth and price stability are concerned, and we certainly use it as one of the elements in our economic assessment”. However, he also said that “… so far, both the real and the effective exchange rate of the euro are at their long-term average.”
But a further strengthening at a similar same pace to what we have observed in recent months would eventually weigh more meaningfully on the economy, and this in turn would lead to a change in the “medium-term outlook for price stability”. The ECB, we think, would react in this case by cutting rates, in an attempt to slow the upward momentum of the exchange rate.
...And while Goldman notes that deposit shifts have begun to 'normalize', fragmentation remains and lending to corporates continues to decline...
One area where there is little evidence of a normalisation is lending to the non-financial corporate sector. President Draghi himself made this explicit in the January press conference, when he said “we have signs that fragmentation is being gradually repaired, but all this has not yet found its way through to the real economy”.
The latest data on bank lending are unlikely to change this assessment as December saw the biggest decline in corporate loans outstanding, with banks reducing loans by EUR52bn in that month alone. Most of that decline reflects ‘statistical noise’ owing to restructuring in the Spanish banking sector, and the December figures need to be treated with some caution. But even accounting for this one-off decline, the number still looks disappointing. Lending in Italy, for example, has declined by EUR9.1bn, raising questions about the improvement seen in the last two months. Bank lending rates are another important indicator for tensions in the peripheral banking system. While we have seen some moderation in bank lending rates in Italy and Spain, the overall level -- and the spread over the equivalent German rates -- remains very high. Finally, the Governing Council will look closely at the result of the Q1:2013 bank lending survey (results will be published the day before the February ECB meeting).
The view of the Governing Council has so far been that it will simply take more time for the improvement in funding conditions for banks to be passed on. We think the ECB will stick with this ’wait-and-see’ approach for the time being.