No change likely from ECB , but QE for a long haul

The recent string of shocks (China, equity market corrections, VW) has brought sizeable downside risks to confidence and the growth outlook. In the recent data, the German August industrial data are probably the most concerning, but some rebound is expected in September due to the volatility of the data and some holiday effects in August. 

"Foreign orders of motor vehicles may however remain weak on the back of the VW scandal in coming months while also exports to the US/UK will need to be closely monitored, as they showed weakening over the summer", says Societe Generale. 

Still, the outlook for domestic consumption in the euro area remains robust on the back of improving labour markets and high real income growth. 

With headwinds for the euro area coming mainly from external demand, one option for the ECB would be to push for a weaker euro but it would require a major depreciation to create some positive momentum for exports in a world of weak demand. 

This suggests that quite extreme measures would be needed from the ECB. With lower market rates, expectations of a cut in the deposit rate have recently risen. 

While having the possibility of affecting the exchange rate, the room for manoeuvre is small and far from sufficient to achieve the big euro depreciation needed. Instead an accelerated QE programme is expected as a first line of defence.

"In terms of long-term structural headwinds, there is in particular homed in on the ECB staff's investment projections as a potential weak spot, we also have inflation well below the target until 2019!", added Societe Generale. 

As discussed by the IMF, weak investment could explain much of the weakness in productivity in recent years and thus secular stagnation trends. 

In a scenario of persistent lowflation, the ECB would be forced to pursue QE for even longer, and the supply of assets should at some point be an issue. The ECB could then be forced to accept taking a longer time to meet the target or reformulating the target. 

Moreover, in case of any shocks, new asset classes, including equity, would likely need to be purchased.