By Balazs Koranyi
FRANKFURT (Reuters) – Several European Central Bank policymakers think the bank’s economic projections are too optimistic as growth weakness in China and trade tensions linger, four sources with direct knowledge of discussions said.
A “significant minority” of rate-setters in last week’s policy meeting expressed doubt that a long projected growth recovery is coming in the second half of the year and some even questioned the accuracy of the ECB’s projection models, given their long history of downward revisions, the sources said.
With the ECB using the these projections as a key input into policy decision, more cuts in growth and inflation forecasts would raise the chance that the bank’s first post crisis rate, now seen next year, is delayed even longer.
An ECB spokesman declined to comment.
The central bank has so far maintained that many of the factors holding down growth are temporary, so the economy would rebound in the second half, after waning exports and eroding confidence nearly dragged Germany into recession late last year.
ECB President Mario Draghi said over the weekend there were signs that these factors were waning, even if political uncertainty loomed large.
But some of his fellow Governing Council members were not as confident and argued that the growth hurdles were far from temporary, so there was no reason to project any significant rebound, the sources said.
While Germany’s vast car sector did take a one-off hit from an adjustment to new emissions-testing methods, more permanent factors could include shifting consumption habits, a move away from diesel and weak Chinese demand, some governors argued, according to the sources.
WEAK GROWTH, TRADE WARS
The policymakers added that weak global trade growth also appears to be more permanent, trade wars now look to be the norm rather than the exception and even if Chinese growth looks to be stabilizing, demand from Beijing is unlikely to surge.
Some governors went as far as saying that the ECB’s forecasting methodology may need to be reviewed since projections are persistently too optimistic and are regularly cut quarter after quarter, the sources said.
The ECB now sees 2019 growth at 1.1 percent but projected 1.7 percent just three months ago.
While others are also prone to forecasting errors, the U.S. Federal Reserve does not publish a single projection, even if individual governors make their forecasts public. And while Fed governors also erred on growth recently, their projections on inflation have been relatively solid.
Some ECB policymakers thought there may be an inherent bias in the bank’s forecasts as they always show inflation on an upward slope, moving toward the ECB’s target and growth returning to trend.
The sources added that ECB President Mario Draghi appeared open to discussing the concerns but showed little interest in doing a deep dive into forecasting methodology just month before the end of his term.
Others told the colleagues at the policy meeting that the key reason for the forecast misses was simply an incorrect assessment of slack in the labor market, the sources said.
The euro zone has created around 10 million jobs since the worst days of its debt crisis and more people are at work than ever before.
Yet inflation is not moving up the way record high employment would warrant, suggesting that the labor market is more flexible than in the past and the natural rate of unemployment has declined.