Euro zone upbeat but political risks ahead

The euro zone economy has kicked off the year robustly, according to data from the Baltic to the Mediterranean. It suggests the ECB's massive cash stimulus is working but also poses questions about what comes next.VIDEO: REUTERS
A euro currency symbol sits on a Eurosystem sign outside the European Central Bank (ECB) headquarters in Frankfurt, Germany.
A euro currency symbol sits on a Eurosystem sign outside the European Central Bank (ECB) headquarters in Frankfurt, Germany. PHOTO: BLOOMBERG

Strong performance seen in latest data from a central bank that has pumped in trillions

LONDON • The euro zone economy has kicked off the year robustly, data showed yesterday, presenting the European Central Bank (ECB) with evidence that its massive cash stimulus is working, but also posing difficulties about the way forward.

There are risks ahead - some political - but for now, the 19 member states are doing better than many expected.

German inflation looks set to come in strongly after five federal states clocked up annual price rises close to - and in three cases, above - the ECB's just-under 2 per cent target for the euro zone.

Spain, the euro zone's fourth-largest economy, reported that its output grew last year, at 3.2 per cent, signalling strong recovery from a banking debt crisis and a recession.

Manufacturing confidence in Holland - the fifth-largest economy - hit its highest level since 2008.

Various economic sentiment indexes for the euro zone as a whole came in much better than expected. Bloc-wide economic sentiment, for example, hit a near six-year high.

Less heralded were signs of growth among the currency bloc's smaller economies.

Lithuania's year-on-year gross domestic product was 3 per cent in the fourth quarter, while Austrian inflation accelerated and its purchasing managers' index soared.

The data came after a week in which other reports showed relatively strong performances continuing into this year for heavyweights Germany and France.

"2017 seems to have started on a very solid footing," said Ms Jennifer McKeown, chief European economist at Capital Economics in London.

All this will be good news for the ECB, which has so far pumped just over €1.5 trillion (S$2.3 trillion) into the euro zone economy to try to stave off deflation and kick-start growth, along with providing negligible interest rates.

But it will also add pressure on the ECB to pull back on some of its largesse. German officials, in particular, take a dim view of the ECB's free spending, and with inflation expected to be higher in Germany, Europe's biggest economy, than across the euro zone as a whole, the pressure will be on.

"If this price development is sustainable, the prerequisite for the withdrawal from the loose monetary policy is created," ECB policymaker and Bundesbank chief Jens Weidmann said last week.

The ECB, however, has indicated it is in no rush to turn off the taps, partly because it wants to see sustainable improvement and does not believe it has evidence of this yet. Some inflation, for example, stems from rising energy prices that will soon have played out in the comparative data.

A series of political events could also complicate and even derail the euro zone's progress. There are many ifs involved, but the presidential election in France could result in an administration led by the anti-euro Marine Le Pen, while a similar result featuring the Five Star movement could occur in Italy.

Greece, meanwhile, has so far failed to get the latest tranche of its third international bailout. Two years ago, it almost became the first country to fall out of the euro zone.

The ECB will be mindful of all this, despite the increasing growth.

REUTERS

A version of this article appeared in the print edition of The Straits Times on January 31, 2017, with the headline 'Euro zone upbeat but political risks ahead'. Print Edition | Subscribe