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Negative Sentiment Pressures ECB

David Becker
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www.iforex.com

European tensions with Russian and are blooming into a trade war, with the EU’s sanctions starting to backfire, and at least in the short run. Sentiment indicators are moving lower, not only in sectors directly involved in trade with Russia, but consumer sentiment shows that domestic sectors are also hit by concerns over the impact on the recovery. The ECB to likely to remain in wait and see mode especially as the implementation of the TLTRO program is still outstanding, but if current trends continue, pressure on the central bank will mount again and the doves at the council will likely push for additional measures.

Russia was the 6th largest trading partner for the Eurozone last year and is also the Eurozone’s most important supplier of energy. Europe imports more than 50% of its total energy consumption, with around 90% of oil and 66% gas consumption coming from outside.

The risk is that the downturn in confidence amid concerns about the impact of geo-political tensions will be turning into a self-fulfilling prophecy that could threaten the still fragile Eurozone economy. Second quarter GDP numbers may have been weighed down by special factors, including the very mild winter, but confidence indicators for July and August and not suggesting a material improvement ahead.

For now the data remains consistent with the ECB’s path of modest growth, but downside risks have clearly increased considerably. Officials hope that the new TLTRO program will help to revive lending to companies there are already signs that banks will use it largely to roll over existing business loans. If ther is no traction with the new program, the pressure on Draghi to do even more to support the recovery is likely to increase again, even if our main scenario for now remains for steady policy for the foreseeable future.

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