Economy

Euro zone recovery may be ‘global growth surprise of the year’

Growth of 0.5% at end of 2016 and first quarter of 2017 confounds expectations

ECB president Mario Draghi said earlier this year that policymakers were now confident they had removed the threat of severe deflation. Photograph: Frederick Florin/AFP/Getty Images

Wed May 3 2017 - 13:02

The euro zone recovery remains on track, with the region’s economy matching its solid performance at the end of last year in the first quarter of 2017.

The single currency area's economy grew 0.5 per cent in the opening quarter, according to a flash estimate from Eurostat, the European Commission's statistics bureau.

The region outpaced the broader EU, which grew by 0.4 per cent. The economy of the euro zone grew by 0.5 per cent over the final quarter of 2016.

“We have been forecasting euro zone growth of 1.7 per cent in 2017, but there now looks to be a genuine chance it could get closer to 2 per cent,” said Howard Archer, economist at IHS Global Insight. “Certainly, the risks to our 2017 growth forecast of 1.7 per cent look increasingly slanted to the upside.”

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The steady start to the year for the single currency area was in line with analysts’ expectations following positive data on the economy in the run-up to the release of GDP figures.

Asset purchases

The data raises the chances that policymakers at the region’s central bank will begin discussions this year on phasing out its €60 billion a month in asset purchases.

After years of underperformance, the euro zone’s economy is now doing better than widely expected. A combination of aggressive monetary easing, healthier banks, cheap oil and less austerity has helped spur a recovery that is growing in strength and breadth.

Unemployment is at its lowest level for seven years, while recent indicators of business and consumer confidence have hit multiyear highs. Although underlying price pressures remain weak, Mario Draghi, president of the European Central Bank (ECB), said earlier this year that policymakers were now confident that they had removed the threat of a severe bout of deflation.

With that threat now gone, policymakers have been gradually adjusting their message on the economy as they start to plan rolling back their landmark quantitative easing programme.

‘Positive’

“The figure confirms the view that the euro zone could become the positive global growth surprise of the year,” said Carsten Brzeski, an economist at ING-DiBa bank.

“If and when political uncertainties fade away further after Sunday’s final round of the French presidential election, the cyclical upswing should gain further momentum, gradually increasing pressure on the ECB.”

Mr Brzeski added: “In fact, if this scenario unfolds, the ECB would be more than happy to start looking for the exit from the current ultra-loose monetary policy. No tightening, but just slowly on taking the foot off the accelerator.”

Policymakers are expected to say in June that the risks to the economic outlook are no longer “tilted to the downside”, but are instead balanced. A change in the narrative is an important step towards a debate on tapering bond purchases, with analysts expecting a discussion to come in the summer.

– (Copyright The Financial Times Limited 2017)

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