Week in Review (28 June)

Core inflation up, but expectation remains for ECB stimulus reboot

Flash inflation figures, published on 28 June, showed that headline price growth in the Eurozone stood at 1.2% for June. This marked no change since May, but was well down from the 2% figure recorded in June 2018. There was some comfort for the ECB, given that core inflation rose from 0.8% to 1.1%. This though, was lower growth than had been expected, and is only marginally up on the 1% recorded in June 2018.

Given the continued weakness in inflation, and the risks posed to the Eurozone economy by the volatile global situation, analyst expectation has now firmly shifted towards a reboot of ECB stimulus measures. Mario Draghi has been pressing a strongly dovish message in recent statements. This has led to some expectation that Draghi will himself oversee a rate cut in one of his final Governing Council meetings. While this is possible, we believe that the thrust of his remarks is also aimed at directing the policy approach of his successor – whoever that may be. The ability of Draghi to himself see through accommodative measures may be affected by the race to be his successor, as runner and riders are assessed for their own willingness to allow further accommodation.

Brexit risks weigh on Irish government spending plans

There is widespread expectation that there will be a general election in Ireland within the next year. In such a situation, a government – even a minority one – would ideally look to take advantage of its incumbency by promising voters economic rewards. As with the election date, however, Brexit clouds the economic outlook in Ireland.

Finance Minister Paschal Donohoe set out the government’s Summer Economic Statement on 25 June. Donohoe admitted that there is a distinct possibility of a ‘disorderly Brexit’ occurring on 31 October, and that as such his Summer Statement contains two scenarios. The budget framework involves a package of €2.8 billion for 2020. In the event of an orderly Brexit this would translate into a surplus of 0.4% of GDP and allow fiscal space of €0.7 billion on top of current and capital expenditure commitments of €1.9 billion. In the event of a disorderly Brexit a headline budget deficit in the region of 0.5% to 1.5% of GDP would be expected.