Euro Area Gets Strong Economic Report Card as ECB Mulls Exit

Updated on
  • French GDP rises for fourth quarter, Spanish growth picks up
  • Economic sentiment in region unexpectedly jumps to decade-high

With the economy expanding strongly and confidence signaling solid momentum ahead, there’s only one subject the euro area is struggling with -- inflation.

A string of data highlighted the robust and broad-based nature of the upswing in the 19-nation region that the European Central Bank is banking on to boost price growth that remains stubbornly below its goal. Economic confidence unexpectedly improved and two of the biggest economies in the bloc extended their solid growth runs.

“The upswing is stronger than expected -- stronger than the ECB probably expected -- but inflation is not there yet,” said Johannes Mayr, senior economist at Bayerische Landesbank in Munich. “It’s a difficult path to navigate. The ECB has to scale back while staying dovish, tighten without endangering the recovery.”

Euro-area economic sentiment rose to a decade-high of 111.2 in July amid increased optimism in services and construction, according to the European Commission. Confidence in industry stayed at the highest in more than six years.

The report came after data showed France is enjoying its strongest continuous expansion since 2011 with output -- driven by exports and investment -- increasing 0.5 percent in the April-June period. Business sentiment in the euro region’s second-largest economy has risen after Emmanuel Macron was elected president on an agenda that promises to make the nation more competitive.

In Spain, the region’s number four, gross domestic product expanded 0.9 percent, the fastest since 2015. The Austrian economy also grew 0.9 percent in the second quarter, its best performance in more than six years.

“The current positive cyclical momentum increases the chances of a stronger than expected economic upswing,” ECB President Mario Draghi argued after the Governing Council’s July 19-20 meeting, adding that downside risks are mostly confined to global factors.

With the economy powering ahead, policy makers are hopeful that a healing labor-market and a closing output gap will finally fuel a sustainable inflation pickup, allowing them to unwind some of the unprecedented stimulus they deployed in the past three years.

A gauge for capacity utilization in euro-area manufacturing rose and selling-price expectations increased in all sectors, according to the Commission report.

Companies such as France’s Remy Cointreau SA and Germany’s Adidas AG are benefiting from a pick-up in demand that’s also bolstered by declining unemployment. The cognac maker reported an 8 percent increase in quarterly sales that beat analysts’ estimates, while the sporting-goods company said 2017 will be even better than it previously anticipated.

Draghi has put a discussion about the future path of quantitative easing on the agenda for the autumn, and investors are hanging on to every word for clues about timing and scope of a reduction of asset purchases that are currently scheduled to run through December.

The International Monetary Fund has urged the ECB to keep its stance “firmly accommodative” until inflation has sustainably entered on a path toward its goal. Consumer prices increased an annual 1.3 percent in June and Draghi said the rate is likely to hover around that level in the coming months.

In July, inflation remained steady at 1.5 percent in Germany and 0.8 percent in France. Eurostat will report data for the region on Monday.

“The recovery is broadening across countries and sectors, and we expect this to continue. The picture has changed significantly from a year ago -- and that’s good news for the ECB,” said Florian Hense, European economist at Berenberg Bank in London. “Having said that, I doubt it serves to materially change the scenario for Draghi or the ECB.”

— With assistance by Mark Deen, Andre Tartar, and Kristian Siedenburg

(Updates with comment from economist from fourth paragraph.)
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