LDN - Business

Euro zone economy sparkles, lights way for ECB pull-back

[March 24, 2017] By Jeremy Gaunt and Jonathan Cable

LONDON (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 further action.

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 mandate.

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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 ECB's target.

"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)

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