Draghi must gauge recovery before decision on stimulus
European Central Bank officials are approaching a major decision on new stimulus amid conflicting economic data and differences over what to do about it.
Economists at the ECB are preparing forecasts for President Mario Draghi to unveil next week that will show whether they still believe an upturn will materialise in the second half of the year. The Governing Council must then decide if it should yet again deploy any of its tools - including a new round of loans - to boost growth and inflation.
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Some policymakers were already losing confidence in the outlook at their decision in April, according to an account of the meeting published last week. Data since that meeting has been inconclusive, with an apparent disconnect between surveys and market indicators that show worsening sentiment, and hard numbers such as GDP and household consumption that suggest resilience.
"The overall picture is still one of below-trend growth," said Aline Schuiling, senior economist at ABN Amro in Amsterdam.
"The big question is what will the ECB do? The minutes showed that they are struggling with the inflation expectations, which are quite low."
Those inflation expectations, a measure of whether investors are confident the ECB will meet its mandate of restoring price stability, are a critical part of the puzzle.
While both headline and core inflation topped estimates in April and underlying gains were later revised even higher, expectations have continued to plunge.
Germany is also an enigma. Beset by trade tensions that threaten exports and domestic troubles at its car factories, the eurozone's biggest economy is anything but a powerhouse at the moment. Yet the moribund mood among companies - confidence is the weakest since 2014 - might be overstated. Household consumption in the first quarter jumped by the most in almost eight years and exports were surprisingly robust.
In both Germany and the eurozone as a whole, much depends on whether a downturn in manufacturing bleeds into the service economy.
Purchasing managers indexes have shown a divergence between the two but unemployment is still declining, putting money in people's pockets. At the same, PMIs last week showed an unexpected drop in services activity.