Eurozone: Economy continues to expand - BBH

Analysts at BBH explain that the Eurozone economy continues to expand at a sufficient rate to absorb some of the spare capacity, and the output gap is closing.  

Key Quotes

“While the regional economy appears to be continuing to operate at strong levels, the momentum has waned.  A small gain or a small rise in the composite PMI will be consistent with this assessment and may not be much of a market factor.  If it were just the real economy, one wag, noted, the ECB would be ending its extraordinary policies. And if it were just the acting, Mrs. Lincoln would have enjoyed the theater.”

“The vast majority of the ECB still appears to believe that the economy still needs extensive monetary support.  Draghi has a fine line to walk, which is even more of a reason why the Jackson Hole forum is a proper venue to talk about the need for structural reform, an important hobby horse of his, but not the nuances of ECB monetary policy.  In September, the ECB is likely to announce an extension of its asset purchases into next year at a slower pace (we suspect 30 bln euros a month down from 60 bln presently and 80 bln initially).  However, as the record of the July meeting showed, officials are sensitive to the market prematurely tightening financial conditions.”