Confidence in depth of euro zone growth grows

The euro zone has shown more signs of consigning its economic crisis to history after data suggesting that its recovery from weak growth and high unemployment was gaining in momentum.

Indicators for France and Germany, the region’s two largest economies, published on Tuesday suggested the recovery was becoming stronger and broader, while the Ifo index of German business sentiment reached its most bullish level since the country’s reunification in 1991.

The mood was “euphoric”, said Clemens Fuest, president of the Ifo think-tank. “What we are witnessing is a strengthening recovery in Europe, particularly in the core . . . From all the data we see, I think it’s going to last.”

Carsten Brzeski, economist at ING-DiBa, the bank, said: “The entire euro zone economy could become the positive growth surprise of 2017. With political risks now ebbing away, economics [has] quickly taken over.”

Euro-zone business activity remained buoyant in May

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A combination of cheap oil and credit, a weaker euro and less austerity has fuelled strong growth across the single currency area. The region’s economic expansion outpaced both UK and US growth in the first quarter of 2017, and unemployment is at its lowest level in almost eight years.

Monetary stimulus

The good news on the economy raises the chances that the European Central Bank will change its view on the region’s economic outlook in June and begin to think about reining in its aggressive monetary stimulus.

On Tuesday, a flash reading of a purchasing managers’ index for the euro zone indicated that economic activity continued to expand at a rapid pace. The index, compiled by data firm IHS Markit, remained at 56.8 this month – on a par with April’s six-year high and well above the crucial 50 figure that marks an expansion in activity.

The survey also signalled that businesses were increasingly taking on more workers, with a separate index for job creation hitting one of the strongest levels recorded over the past decade.

Reading for France

The PMI reading for France hit a six-year high of 57.6, showing the momentum behind economic recovery that President Emmanuel Macron hopes to capitalise on following his election victory this month. A PMI for Germany also hit a six-year high of 57.3.

“As Emmanuel Macron has moved into the Elysée Palace and the economic recovery is gaining traction across the globe, sentiment in Germany currently seems to know just one direction - up,” said Florian Hense, economist at Berenberg, a Hamburg-based bank.

The Ifo hit 114.6 points in May as German businesses bet that the country’s economy would become increasingly strong. Mr Fuest said manufacturers would ramp up production in the coming months to take advantage of rising prices and export partners’ stronger growth.

Construction activity, one of the worst performing sectors after the financial crisis, has also picked up.

Labour market

The euro zone labour market remains a black spot despite the falls in the headline unemployment rate, with underemployment of workers a concern. Eurostat figures published on Tuesday showed that more than one in five of the EU’s 45 million part-time workers wanted to work longer hours.

The rates of underemployment were particularly high in weaker economies, such as Greece, Cyprus and Spain. The figure, for 2016, is down from 22 per cent for the previous year.– Copyright the Financial Times Limited 2017