A war of attrition in the fight against Euro area's secular stagnation

With the IMF again reducing its global forecasts recently, although still believing in a gradual recovery, the ECB's Governing Council is bound to worry over its own forecasts for growth and inflation. ECB staff's investment projections are homed in as a potential weak spot.

Also, there is inflation well below the target until 2019. As discussed by the IMF, weak investment could explain much of the weakness in productivity in recent years and thus secular stagnation trends.

In its latest Bulletin, the ECB responded to a long-standing request from the Governing Council to look at alternative measures of slack. In Box 6, ECB staff developed a tool that draws on information about demand from survey indicators, showing that the amount of slack in 2014-15 was declining relatively rapidly and suggesting an output gap in the order of -1% to 0.3% rather than more traditional measures pointing to around -2.5%. 

This could explain the ECB staff's relatively optimistic forecasts for investment in 2016-17  which are 3.4% and 3.9%, respectively. However, the latest Accounts described how Governing Council members discussed alternative measures pointing to possibly even higher slack, which could be reconciled with current high levels of unemployment. 

Governing Council members thus appears more cautious over the chances of investment taking over the baton once lower energy price-induced consumption fades in 2016. This would in turn imply that they are well prepared for the risks of conducting a long term trench war against lowflation. 

"This could also make them careful in accelerating asset purchases in the short term, as the supply of assets at some point may be an issue. While further adjustments to the purchase parameters are possible, they would come at the price of distorting markets more significantly", says Societe Generale.