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 Recent evidence has been mixed. There has been general improvement
but a growing disparity between Germany and France, the currency
union's largest economies.
Reuters polls suggest euro zone GDP will come in at 0.2 percent
quarter on quarter for a year-on-year increase of just 0.4 percent.
Germany's projected 0.3 percent quarterly rise, however, would
translate to a relatively strong 1.3 percent for the year.
"The euro zone's economic outlook is slowly improving with even the
likes of Greece showing signs that the worst is over," Northern
Trust wrote in a note. "However, Europe's economic fundamentals are
fragile, with deep divisions in performance among nations."
The ECB sat on its hands last week but gave a fairly clear steer
that action could be taken next month if new internal forecasts show
a further deterioration in inflation — falling so low as to trigger
some concerns about deflation — and growth.
Bank President Mario Draghi pointedly flagged the Q4 gross domestic
product data as crucial to the bank's thinking.
But what to do? A small interest rate cut from 0.25 percent to
somewhere just above zero is hardly going to be a game changer and
the ECB has already said it won't prime banks with long-term cheap
money again unless they commit to lend into the real economy.
Bank stress tests looming to check on the stability of the financial
system. Those same banks are also being told to deleverage and build
up capital.
So while a case can be made for more cheap long-term loans, or LTROs,
if banks do commit to pass the money on to businesses, it would not
be straightforward for them.
The ECB has discussed ceasing to soak up money it spent buying
sovereign bonds during the euro zone's debt crisis. Ending such "sterilisation"
would inject about 175 billion euros of liquidity into the financial
system. That would ease strains in euro zone money markets but
probably do little to boost inflation, which the central bank wants.
That leaves printing money, or "quantitative easing", one of the
ECB's last unbroken taboos. It is a long way off if it comes at all.
But as Japan has shown, it's one of the few levers that could get
prices rising again.
Another big set piece during the week is the Bank of England's
quarterly inflation report.
All eyes will be on Governor Mark Carney and his ability to persuade
markets and British people and companies that interest rates won't
rise soon.
He is expected to give some indication about what path "forward
guidance" — the expectations of what will happen — will take after
the UK unemployment rate shot down to his trigger point for
potential rate rises in months, rather than the years he expected it
to take.
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The Bank is likely to be less specific than before, and may
introduce something like the U.S. Federal Reserve's system of
tracking the change views of individual policymakers. But an actual
rate hike remains a long way off.
Italy, meanwhile, is braced for a credit rating review from Moody's
on Friday. The agency has a Baa2 rating — two notches above junk — with a negative outlook so there could be some risk of a downgrade
although recent data suggest the economy could have grown in the
last quarter of 2013 for the first time since mid-2011.
EMERGING BETS
Any data or set-piece economic event during the week will fade in
importance, however, if the rout in emerging markets continues.
Central banks in countries as diverse as Turkey, India, and Hungary
have been struggling to contain huge investment outflows that have
knocked their currencies down.
The flip side is that developed markets are being threatened by
imported disinflation from cheaper imports and their exporters risk
becoming uncompetitive.
"Developments in global money and financial market conditions and
related uncertainties, notably in the emerging market economies, may
have the potential to negatively affect (euro zone) economic
conditions," the ECB's Draghi said last week.
The drive for much of the emerging currency flight has been concern
about slowing growth in China and the U.S. Fed's withdrawal of
monetary stimulus based on an improving economy.
China reports import and export data in the coming week, and the
United States reports industrial and manufacturing output, all of
which should go to the heart of the twin drivers.
But last Friday's robust U.S. jobs data made it unlikely that the
Fed would change its stimulus-tapering plans — to the chagrin of
some emerging markets.
(Additional reporting by Mike Peacock;
editing by Louise Heavens)
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