Hot and cold: Euro zone
grows but inflation slows
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[July 31, 2017]
By Philip Blenkinsop
BRUSSELS (Reuters) - Data in the coming
week should confirm the euro zone economy is running hot, after the IMF
upgraded growth forecasts and Greece returned to the debt market,
although inflation figures could throw cold water on ECB plans to start
Growth in the single currency area outstripped paltry expansion in the
United States and Britain in the first quarter and the pace did not let
up in the April-June period.
The euro zone may not be growth champion in the second quarter, after
the U.S. rebounded to an annualized 2.6 percent thanks to consumer
spending and business equipment investment. But it should again fare
better than Britain, whose economy failed to build momentum.
A forecast expansion of 0.6 percent in the April-June period, equivalent
to an annualized 2.4 percent, would be the third consecutive quarter in
which the euro zone has grown at or above a half percentage point, for
the first time since 2007-08.
"The global economy has been a jumbo jet running on just one engine for
the last five, six years, the U.S., but now it seems there's more from
the euro zone as well, with encouraging signs from Asia too," said James
Knightley, chief international economist at ING.
Data on Friday showed the euro zone's second-largest economy, France,
grew by 0.5 percent for a third successive quarter, while Spanish GDP
returned to pre-crisis levels with 0.9 percent expansion.
"Momentum is there. We're getting a broadening out of countries in terms
of economic performance. It's not just the likes of Germany driving it
all forward ... There does seem to be self-sustaining momentum," said
Euro zone economic sentiment, as compiled by the European Commission,
grew for a third straight month in July to a new 10-year high due to a
pick-up of the dominant services sector. And confidence levels in all
sectors, as well as for consumers, are far above historical averages.
The International Monetary Fund has hiked outlooks for China and the
euro zone, while trimming those for the United States and Britain. The
Fund said the euro zone's recovery was firming and becoming broad-based,
with stronger domestic demand, although it warned of downside risks.
STUBBORN INFLATION, EURO STRENGTH
Political risks seen at the start of the year ahead of elections in
France and the Netherlands have diminished, while Greece has returned to
the bond market after a three-year exile.
Five years ago, European Central Bank President Mario Draghi pledged to
do "whatever it takes" to save the euro. His ultra-easy monetary policy
is partly behind the robust economic recovery, showing more effect this
year as growth in bank loans to the private sector hit a 10-year high in
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Customers push shopping trolleys on an escalator at the Bercy
shopping centre in Charenton Le Pont, near Paris, August 29, 2013.
Now the question is when to taper. Strong economic growth should steer the ECB
towards reining in asset purchases, but policymakers are still waiting on
The flash estimate for July, due on Monday, is seen stable at 1.3 percent, well
short of the ECB's target of just below 2 percent. Perhaps more significantly,
the core figure, without volatile energy and unprocessed food prices, is seen
"The economy is recovering and the labor market is doing quite well, but we
think core inflation will be at 1 percent and below for the rest of 2017," said
Marco Wagner, economist at Commerzbank. "Except Germany, if you look at France,
Italy, Spain or Portugal there are still overcapacities, still relatively high
Among the clearest signs of a rebound has been the euro's pick-up to around
$1.17, from $1.05 at the start of the year. UniCredit on Thursday raised its
forecast for the euro-dollar rate to $1.20 for the end of the year and an
"equilibrium" rate of $1.25 for end-2018, from $1.14 and $1.18 respectively
"The political risk factor has been taken out," said Vasileios Gkionakis,
co-head of strategy research at UniCredit. "It would bring the rate in line with
our estimate of fair value and in all likelihood the market will overshoot."
Of course a stronger euro could dampen euro area growth and cap inflation, a
further issue for ECB policymakers to consider.
Outside Europe, U.S. monthly jobs data for July on Friday is likely to be the
key figure for economists and the Federal Reserve, whose policy-setters next
meet on Sept. 19-20.
U.S. job creation surged by more than expected in June and is seen lower but
still strong in July, a sign of labor market strength that could keep the Fed on
course for a third interest rate hike this year.
More significant may prove to be average wage growth, however. It is seen at 0.3
percent, the highest rate since February, after months of hovering between 0.1
and 0.2 percent.
(Reporting by Philip Blenkinsop; Editing by Catherine Evans)
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