Back in December when Mario Draghi revealed the latest ECB staff inflation forecast, when oil was already plunging, the ECB slashed its 2015 inflation forecast from 1.1% to 0.7%, while reducing the 2016 HICP inflation estimate modestly from 1.4% to 1.3%. Moments ago, during the ECB press conference, Draghi revealed the latest set of staff forecasts. They were, to put it mildly, bullish.
First, here is the GDP forecast:
- 2015 GDP is now seen at 1.5%, vs 1.0% previously
- 2016 GDP is now seen at 1.9% vs 1.5% previously
- 2017 GDP – a new data point – is now seen at 2.1%
Good luck with all that, especially in a world in which China – the Eurozone’s most important trading partner – is now openly warning that 2015 will be worse than 2014, and with a Grexit now lurking just around every corner, an outcome which would send Europe right back into a depression, there is zero chance the ECB hits these latest revised forecasts.
But where the fun really begins with the ECB projections is when it comes to inflation. Not surprisingly, the trend of short-term deflation expectations continues to accelerate, and that already slashed 2015 inflation forecast which was 0.7% in December has been bombed into the stone age as of March, down to precisely 0.0% (a number which will with 100% assurance end up negative by year end). The reason for the collapse? Plunging Oil – the same plunging oil that was perfectly obvious to the ECB back in December when it revised its forecasts lower once again.
And the punchline: the ECB’s 2016 forecast. Because while the ECB slashed its 2015 inflation projection to 1 decimal point away from outright deflation, it boosted its 2016 inflation forecast from 1.3% to 1.5%. Why? Because Draghi hopes that oil prices will finally rebound. In other words, the head of the ECB is betting the farm, and QE, on Saudi Arabia succeeding to crash the US shale industry over the next 9 months, which is ironic, because the same shale industry can continue to keep itself funded despite its record negative cash flow, and avoid default and liquidation, precisely due to Draghi’s QE, and scramble for yield… even if it means buying 3rd lien bonds offered by Ca/CC rated shale drillers who won’t be able to make even one payment!
