ECB president Mario Draghi (centre) arrives for a news conference at the ECB headquarters in Frankfurt on Thursday. Draghi has underlined policy makers’ willingness to keep buying public-sector assets until the strategy has achieved its goal.

Bloomberg/Frankfurt

To the casual observer, it looks like Mario Draghi’s quantitative easing isn’t working.
Economic forecasts unveiled by the European Central Bank president on Thursday were even weaker than those in March, just before the €1.1tn ($1.2tn) bond-buying plan started. Yet while cooling global trade and slumping oil prices do threaten to set the inflation counter back to zero, the slow burn of stimulus plus the temporary nature of the external shocks could still see Draghi’s stance vindicated.
Incoming data show that the 19-nation euro-area economy is in better shape than it has been for years, and the fact that recovery isn’t yet translating into sturdier price growth is a problem that’s affecting every major global central bank. Even so, to ward off the risk that low inflation expectations morph into permanently low growth assumptions, Draghi underlined policy makers’ willingness to keep buying public-sector assets until the strategy has achieved its goal.
“If QE was only designed to affect inflation expectations, then you could argue we’re back where we started,” said Christian Reicherter, an analyst at DZ Bank in Frankfurt. “Even if Draghi has basically left the door open for further ECB measures, he’s first playing for time in the hope that gradually rising inflation toward year end pushes speculation about an expansion of QE into the background.”
Draghi found himself announcing downgraded staff forecasts in Frankfurt after a summer scarred by emerging-market turmoil from China’s stock-market slump and a slide in commodity prices. Rather than confidently predicting the gradual rise in growth and inflation that the ECB pledged would accompany QE, he had to acknowledge that the outlook has deteriorated.
The ECB now foresees consumer-price growth of 1.1% in 2016, compared with its March forecast of 1.5%. Inflation in 2017 was downgraded to 1.7% from 1.8%. The ECB’s goal is just under 2%.
The economic-growth outlook for 2016 was shifted down to 1.7%, compared with 1.9% in March, and for the following year to 1.8% from 2.1%. “There’s significant uncertainty and it’s not clear whether we’re looking at a pothole or an avalanche,” ECB Governing Council member Ewald Nowotny told reporters in Alpbach, Austria yesterday. “There is a possibility of additional expansionary monetary policy by the ECB but it is not currently a topic, and it is not foreseeable whether it will be needed.”
The ECB’s 25 policy makers held off from responding immediately to the worsening situation. Firstly, Draghi explained, with so much financial-market volatility in recent months, it’s impossible for ECB officials to separate short-term noise from the longer-term economic signal.
As an illustration of investors’ confusion, market-based inflation expectations have bounced around in the six months since March, climbing as high as 1.9% in July and dropping as low as 1.6% in August. After Draghi’s press conference they were at 1.7%. “If you look at inflation expectations, they have been pretty volatile - they went down, then they went up, and this may be due to many, many causes,” Draghi said. “So we’ll have to assess and look through all these several factors before we can decide whether the medium-term outlook has worsened.”
Secondly, the ECB’s asset-purchase program has only just started, with another year to run. In normal times, the transmission of monetary-policy impulses can take as long as 18 months before conditions in the real economy change.
“Draghi acknowledged that the policy stance must be reviewed, but he needs more time to assess the risks,” said Ken Wattret, chief eurozone market economist at BNP Paribas in London. That said, “it’s very likely that by December it will be difficult to put forward projections that are consistent with the ECB’s mandate without further action.”
The ECB started QE in March with a following wind — an economy showing signs of revival after a record recession and a debt crisis that almost shattered the single currency.
By last month, the region’s recovery was proceeding apace, with the exception of France as the only one of its four largest economies to struggle. A Purchasing Managers’ Index for the manufacturing and services industries in the currency bloc rose to the highest level since May 2011.
Now Draghi is facing the headwinds of a global economy that threaten to curtail the euro-area rebound. German factory-orders data published yesterday gave a hint of what may be to come. Orders, a signal of future output, slid more than estimated in July as rising demand from within the currency bloc failed to offset a 9.5% slump in orders from outside the region.
In holding back from further stimulus for now, the ECB is allowing economic developments to average out, while stressing officials’ readiness to act, according to Karsten Junius, chief economist at Bank J Sarasin in Zurich.
“The forecasts are a reflection of the extremely robust data recently that are pointing to an inherent stability of the economy, paired with the thunderclouds in emerging markets that could rain on the outlook from the fourth quarter onward,” he said. “With inflation so close to zero, it’s advisable to be vigilant.”