Photographer: Marlene Awaad/Bloomberg

Euro-Area Economic Confidence Hits Highest Since 2011

  • Sentiment index increased to 107.9 in January from 107.8
  • Reports on euro-area inflation, economic growth due Tuesday

Euro-area economic confidence hit a six-year high in January, adding to signs of stronger growth and inflation that are fueling a debate about European Central Bank stimulus.

An index of executive and consumer sentiment rose to 107.9. from 107.8 in December, the European Commission said Monday. That’s the highest reading since March 2011 and compares with the 107.8 median estimate in a Bloomberg survey of economists.

The improvement will feed into the discussion about quantitative easing after an inflation surge at the end of last year prompted some calls to wind down the program. While patience seems to be running low in Germany, where large-scale asset purchases were criticized from the start, officials including ECB President Mario Draghi insist that it’s not yet time to discuss exit strategies as underlying price pressures remain weak and there are still risks to the economic outlook.

“Short-term sentiment indicators are quite positive but there’s a lot of risk and a high probability that they won’t be matched by growth picking up,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “It’s a bit early to be overly optimistic and confident.”

Sentiment in industry and among consumer improved in January, according to the report, while confidence in services, retail and construction slipped.

While global growth is picking up, underpinning a recovery in manufacturing, protectionist trade policies pursued by the new U.S. administration and a hard break of the U.K. from the European Union are threatening to weigh on exports. Elections in some of the region’s largest economies also add to uncertainty.

Mixed Blessing

Business confidence in Germany slipped at the start of the year, according to the Ifo institute, and a gauge of manufacturing and services activity fell to a four-month low. Inflation in Europe’s largest economy accelerated to 1.9 percent in January. Economists had predicted a reading of 2 percent.

In the euro area, price growth picked up to 1.5 percent from 1.1 percent, according the median of 52 forecasts in a separate survey. That would be the fastest pace since mid-2013 and exceed the average the ECB predicts for this year. Eurostat will publish the data at 11 a.m. on Tuesday, together with December unemployment figures and a first estimate for gross domestic product in the fourth quarter.

“Higher inflation is a mixed blessing for the ECB, which would like to see sustained signs of generalized inflationary pressures in the core reading and wage inflation,” said Ben May, an economist at Oxford Economics in London. “If we see a pick up there, it becomes legitimate to rethink the strategy, but if we don’t, the ECB could argue tightening policy would be like putting the breaks on the recovery too soon.”

Growth probably accelerated to 0.4 percent in the final three months of the year, driven by expansions in Germany and Spain.

(European Commission corrects confidence index. Changes affect headline, second and fifth paragraphs.)
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