The European Central Bank continues to defy expectations for a clear timeline to exit its stimulus plan as inflation remains below target.

There is growing divergence among the monetary policies of the world’s major central banks. While the Fed tightens monetary policy by shrinking its balance sheet and raising interest rates, the ECB is being determinedly quiet about its plans for the end of quantitative easing (QE) and the transition to the next phase in monetary policy. In the eurozone, inflation has disappointed and remains below the expectations of the central banks.

Central bank remains dovish

The ECB continues to sit on its hands, defying expectations that it would begin to make clearer its plan for an exit from QE. This does not mean the most likely course has changed; it just means that the doves on the Board hold the upper hand in arguing that there’s no need to commit to a particular course just yet. After the most recent ECB meeting, President Mario Draghi said the moderation in economic activity has not led to any change in the bank’s view. However, the overall tone of his remarks was a little dovish. We continue to think that the likely trajectory of the ECB will be very cautious.

The ECB continues to sit on its hands, defying expectations that it would begin to make clearer its plan for an exit from QE.

Pace of growth moderates

Growth among eurozone economies has eased quite considerably. Manufacturing appears to have peaked in November 2017 and has eased since then. It would be wrong to describe it as weak, but manufacturing isn’t growing at the pace seen in the latter part of 2017. There are also some signs that the services sector is beginning to decelerate.

While the gap between surprise indicators in the United States and in the eurozone is extremely wide, we believe it is likely to narrow, and that this will happen through downward revisions in expectations for the eurozone rather than because the data is going to show evidence of renewed vigorous growth. The second quarter of 2018 is likely to be slightly stronger than the first quarter, but not as strong as the fourth quarter of 2017. Perhaps, the bigger issue is the persistent weakness in inflation.

The second quarter of 2018 is likely to be slightly stronger than the first quarter, but not as strong as the fourth quarter.

Economic data from Germany, in particular, turned surprisingly weak in April. Germany is growing, its labor market is tight, and wages are rising. And while there are some oddities in the German price data that can be explained by weather and the variations in the timing of Easter, the pace of inflation does seem to be a little lower than the ECB had been expecting. Harmonized inflation in Germany (HICP) was 1.4% in April. Remember that the only way the periphery countries, including Spain and Greece, can continue to gain competitiveness within the eurozone is by running inflation levels that are lower than in Germany. The job of rebalancing the region’s economy would be a lot easier if inflation in Germany was above the overall target.

Next: Cross currents in emerging markets


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Our outlook contains some small but noteworthy shifts. Rising oil prices are expected to lift slightly the trajectory of inflation in the United States because of the pass-through to consumer prices.