ECB may sound a little more upbeat on inflation - ABN AMRO

"Although eurozone economic data remain patchy and downside risks to the outlook dominate and have even increased somewhat, that has been the case for some time," argues Aline Schuiling, ABN AMRO senior economist. 

Key quotes

"All through this period, the ECB has remained upbeat about the economic outlook and has continued to sound upbeat about the economy’s fundamentals and has maintained its risk assessment as being ‘balanced’. As such, we see little reason for a change in tone at this meeting. We think it would take a more severe turn in the economic data or risk spectrum for the ECB to shift its language. Reporters may well try to get Mr Draghi’s take on the Italian budget, and the possible impact on ECB policy, but we doubt they will get much joy there."

"On inflation, the ECB may sound a little more upbeat, given the recent rise in the growth of negotiated wages. Indeed, growth in negotiated wages has picked up to 2.2% yoy in Q2, up from 1.7% in Q1. However, we think this pick-up does not reflect the fact that the labour market is tightening and that underlying inflationary pressures have started to build, but has to be seen as compensation for the loss in real wage growth in 2017."

"Due to a jump in energy prices, headline inflation rose to 1.5% on average in 2017, up from 0.2% in 2016. As nominal wage growth was very close to headline inflation, real wages merely stabilised after they rose by 1% in 2016. Considering that labour productivity grew by almost 1% in 2017, the share of labour income in GDP declined, which (excluding any impact of tax changes) has been to the benefit of company profits."

"This means that the recent pick-up in wage growth probably merely reflects payback for 2017. Meanwhile, there is still significant slack in the labour market, with the unemployment rate as well as broader measures of labour market slack still well above pre-crisis levels currently. Meanwhile, there is still little sign of any change in the trend in core inflation, which has remained flat at around 1%."