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 An analysis of Reuters polls shows more than half the most important
economic reports since the start of the year, as well as data across
the bloc's four largest economies, have beaten the consensus
forecast and many have topped the highest prediction.
This latest turn, which comes despite concerns over Greece's future
membership in the euro and no real respite to conflict in Ukraine,
suggests fears of a deflationary spiral in Europe have been
overdone.
Germany, Europe's largest economy, is the clear leader. Retail sales
growth for January almost tripled the highest forecast and helped
propel the wider euro zone figure to over 10 times the Reuters
median on Wednesday.
Two other Germany releases - fourth quarter GDP growth and the flash
services PMI reading for January - also topped the highest forecast.
Taken alongside average 3.2 percent negotiated pay rises at a time
when inflation has evaporated, the data suggest that ECB
quantitative easing may soon look like the last thing Germany needs.
Economists point to the greater discretionary income given to
consumers by a dramatic fall in energy prices and a significantly
weaker euro, partly in anticipation of the ECB’s bond-buying
program, as key factors.
"Everyone got caught up in the debate of deflation, Greece and the
Ukraine crisis and so expectations were quite low," said Christian
Schulz, economist at Berenberg Bank.
"It now seems the deflation story is a positive one for the euro
zone since cheaper oil means consumers spend less on energy and have
more money in their purse."
While the Federal Reserve and Bank of England have viewed cheap
energy as a boon to their economies, the ECB has fretted that it
could entrench deflationary expectations.
In Spain, both the flash manufacturing and services PMI for January
beat the consensus, while GDP growth in Italy, which is still
contracting, was not as bad as the Reuters median.
Even in France, Europe's second largest economy, the latest
industrial output beat the Reuters consensus, while the services PMI
data was higher than all predictions.
The ECB will almost surely announce an upward revision to staff
growth forecasts at its monthly meeting on Thursday at the same time
as giving more detail about its hotly-debated quantitative easing
program which commences in March many years after its peers have
shuttered theirs.
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"In terms of timing the ECB got lucky," said Schulz. "If it still
had to announce it tomorrow, given all the strong data we've had,
the backlash, especially from Germany, would have been much more
severe than it was in January."
For now, disinflation remains the prevailing force globally with
only a few exceptions. Euro zone inflation for the most part has
come in on consensus or weaker than forecast.
But while oil prices have knocked inflation to very low rates, often
below zero, simple maths show that once oil stabilizes or begins to
regain lost ground, inflation will turn higher.
On top of that, the boost from weak oil and the euro only lasts so
long as a boost to activity unless they keep falling indefinitely.
Only when those factors drop out of the equation will it become
clear whether the recovery is durable or not.
In the meantime, global stimulus keeps piling up.
China's central bank just cut interest rates for the second time
since November and India's central bank also cut rates unexpectedly
on Wednesday, among a burst of more than 20 often dramatic policy
easings from global central banks since the start of the year.
The prevailing consensus is that the ECB's purchases of mostly
government bonds, worth 60 billion euros a month and running through
September 2016 to start, will be either just enough to lift
inflation toward a target of close to but below 2 percent or will
need to be extended.
But if the broader euro zone economy is shifting up a gear just as a
blast of stimulus is about to take hold, that view may not hold for
long.
(Reporting By Ross Finley and Sumanta Dey. Analysis by Deepti Govind
and Hari Kishan. Editing by Mike Peacock)
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