ECB: Problem is the failure of many countries to enact structural reforms - BBH

Research Team at BBH, notes that the flash Eurozone composite PMI slipped marginally to 52.9 from 53.0.

Key Quotes

“The market had expected a small increase. The service component was unchanged at 53.1 while the manufacturing PMI eased to 52.4 from 52.6. The composite appears consistent with 0.4-0.5% Q2 GDP, which by most estimates is near trend growth for EMU.

A worrisome feature is that the forward-looking new orders fell to their lowest level since the start of the year. German new orders were at ten -month lows. This warns that the increase in output was to fill the backlog rather than new business. On the other hand, at next week's ECB meeting, officials may note the first of input prices in five months.

The problem for the ECB is not current growth; it is the failure of many countries to enact structural reforms that would raise growth potential. That said, the ECB’s new measures did not prevent the IMF from revising its GDP forecast lower. ECB officials expect price pressures to increase as the year progresses partly as a result of the base effect and partly as a result of strengthening demand.

It is unrealistic to expect the ECB to extend its easing program until the effects of its new measures can be assessed or until it is clear that price pressures are not increasing. We suspect that the earliest ECB can reach such a conclusion is near the end of the year. Again, ECB action is perfectly understandable without having to claim a Shanghai Agreement."