Euro zone economy
sparkles, lights way for ECB pull-back
Send a link to a friend
[March 24, 2017]
By Jeremy Gaunt and Jonathan Cable
(Reuters) - If the latest surveys of business intentions are to be
believed, the euro zone economy is sparkling, growing at a pace that
easily explains the hints from some European Central Bank policymakers
of a pull-back from their easy-money regime.
IHS Markit's euro zone Flash Composite Purchasing Managers' Index (PMI),
an influential guide to the buying plans of businesses and hence growth,
hit a near six-year high this month.
It climbed to 56.7 from February's 56.0, its highest reading since April
2011 and better than any predictions in a Reuters poll.
At the same time, flash surveys for the currency bloc's two largest
economies -- Germany and France -- also stormed past expectations to
register near six-year highs, conditions likely to play into elections
in both countries this year.
"This is a really solid rate of expansion. It's an economy firing on all
cylinders," Chris Williamson, chief business economist at IHS Markit,
said of the euro zone.
He added that it implied first quarter economic growth of 0.6 percent
quarter on quarter, which would be the joint highest reading since the
first quarter of 2011.
One immediate impact may be to put pressure on the ECB to begin rolling
back its historically easy monetary policy, a combination of zero to
negative interest rates and a large asset-buying program.
Earlier this month the ECB pledged to extend its bond-buying program to
at least the end of the year, citing weak underlying inflation and
lackluster growth in the euro zone. It will, however, reduce its monthly
spend from April.
It also highlighted that it no longer felt a "sense of urgency" to take
Since then some ECB policymakers, notably Austria's Ewald Nowotny and
Italy's Ignazio Visco, have spoken of a rate hike within or just after
the period of the bond-buying program.
"These (PMI) numbers will likely reinforce the ECB's view that downside
risks are diminishing. But the central bank will only tighten
gradually," Morgan Stanley said in a note.
The key will be inflation, control of which is the ECB's primary
[to top of second column]
Glasses go under fire during production at the Duralex International
glass factory in La Chapelle-Saint-Mesmin, near Orleans, France
March 10, 2017. REUTERS/Benoit Tessier/File Photo
Markit's euro zone PMI sub-index measuring prices charged by businesses
rose to a near six-year high of 53.3.
Inflation in the euro zone was 2.0 percent in February -- around the
"What we are picking up is an increase in suppliers' ability to hike
prices due to strong demand. If that continues to intensify the ECB
should become more worried," Markit's Williamson said.
FRACTURING THE FORECASTS
All nine of Friday's PMI reports -- manufacturing, services and
composite for the euro zone, France and Germany -- beat even the most
optimistic forecasts in Reuters polls of economists.
France's composite registered 57.6 in March from 55.9 in February, a
particularly significant rise given the country's economy is generally
lagging and this put it above Germany.
How such data plays into the French presidential election, the first
round of which is in April, remains to be seen.
National Front candidate Marine Le Pen will be hoping to capture votes
from those angry with their economic lot. But the two other leading
candidates, Emmanuel Macron and Francois Fillon are both calling for
economic reform. A hefty chunk of the electorate has yet to decide who
to vote for, if the polls are anything to go by.
Germany's PMI was driven mainly by strong demand for manufactured goods
from the United States, China, Britain and the Middle East.
The manufacturing index -- reflecting more than two-thirds of the
economy -- rose to 57.0 from 56.1 in February.
Such growth may well increase Germany's current account surplus, a bone
of contention between Berlin and others from Washington to Brussels.
(Editing by Hugh Lawson)
[© 2017 Thomson Reuters. All rights
Copyright 2017 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.