LDN - Business

Potent euro zone growth, inflation pressures reluctant ECB

[January 31, 2017] By Jan Strupczewski and Francesco Guarascio

BRUSSELS (Reuters) - Inflation in the euro zone has risen to just below the European Central Bank's target, economic growth is accelerating at greater speed than in the United States, and unemployment has hit a more than seven-year low.

Myriad data releases showed on Tuesday that the 19-member currency bloc's economy is on the mend - a confirmation of recovery that will intensify political pressure on the European Central Bank to haul back its generous stimulus program.

But while the noise from hawks in countries like Germany will undoubtedly get louder, the ECB is likely to stand firm with its policies in the near term, believing some of the key data is not sustainable.

Inflation accelerated to 1.8 percent year-on-year in January, Eurostat estimated, up from 1.1 percent in December, leaving it just shy of the ECB's medium-term target of below but close to 2 percent.

It was the highest rate since February 2013 and came after data in the past two days that showed prices rising in Germany, France and Spain, three of the bloc's four biggest economies.

But core inflation, which excludes volatile prices of energy and unprocessed food and which is the ECB's focus, came in only stable, at 0.9 percent year-on-year.

ECB President Mario Draghi has said he will look past energy price fluctuations until underlying inflation picks up in a "convincing" way.

One of Draghi's rate-setting colleagues, Ewald Nowotny, has also pretty much shut down any move soon, particularly on tapering, or easing off its asset-buying program - something economists have noted.

"With core inflation still weak, it seems unlikely that this will cause the ECB to change course" on its bond-buying program, said Bert Colijn, economist at bank ING.

Nonetheless, the barrage of positive economic news is likely to mean some policy change ahead.

"We're seeing a sharp jump in inflation in many countries ... this situation could lead to a tightening of monetary policy from central banks and a rise in interest rates over the long term," Spanish Economy Minister Luis de Guindos said, referring to the global rather than specifically euro zone picture.

Spain's year-on-year inflation rate in January came in at 3.0 percent - but de Guindos said he expected it to ease back in the second quarter.

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A man passes a sign advertising the first day of winter sale shopping in a retail shop in Vienna, Austria, December 28, 2016. REUTERS/Leonhard Foeger/File Photo

Energy prices jumped 8.1 percent year-on-year in January after a 2.6 percent increase in December and unprocessed food was 3.3 percent more expensive than a year earlier.

UPWARDS

But the euro zone is clearly enjoying something of an economic renaissance, the beneficiary of just over 1.5 trillion euros in stimulus from the ECB and negligible borrowing costs.

Eurostat said euro zone gross domestic product rose 0.5 percent quarter-on-quarter in the last three months of 2016 for a 1.8 percent year-on-year rise.

The quarter-on-quarter growth would mean an annualized rate of 2 percent, higher than the 1.9 percent annualized rate reported for the U.S. economy, the world's biggest.

Whether this can last will depend on a number of factors, not least of which is that if inflation keeps rising, consumer spending may be hit.

Bringing political risk into the mix, there are also elections ahead in France, the Netherlands and possibly Italy.

"We suspect the euro zone may find it difficult to sustain this momentum amid appreciable political uncertainties during 2017 and likely reduced consumer purchasing power due to higher inflation," said Howard Archer, economist at IHS Global Insight.

But stronger economic growth also helped bring down the bloc's unemployment rate to 9.6 percent in December, the lowest since May 2009, before Greece's debt crisis broke out.

Joblessness has been one of the euro zone's biggest problems, triggering demands for economic reforms to free up labor markets.

"This starts to get closer to figures that would justify more wage pressures, but it seems unlikely that this will happen in a meaningful way in the first half of 2017," ING's Colijn said.

"Nevertheless, the ECB will look at this batch of data with a mix of joy and concern, as it does show that the economy is moving in the right direction, but it will probably bring out the hawks early."

(Reporting by Jan Strupczewski, Francesco Guarascio and Philip Blenkinsop; Writing by Jeremy Gaunt; Editing by Catherine Evans)

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