With the European Central Bank’s (ECB) monetary policy decision just around the corner, I figure today’s a good time as any to review the region’s economy.
Do conditions in the euro zone still warrant a “fairly substantial amount of monetary accommodation” as ECB head honcho Mario Draghi suggests? Here’s a quick review of the economy:
- The euro zone economy grew by 0.5% in Q1 2017, matching Q4 2016’s growth and analysts’ expectations. This translates to an annualized gain of 1.7%, a bit lower than Q4’s 1.8% reading.
- Finland (+1.6%), Latvia (+1.5%), Portugal (+1.0%), Spain (+0.8%), and Germany (+0.6%) all saw higher GDP in Q1, while France (+0.3%), Netherlands (+0.4%), and Cyprus (+0.6%) showed slower growth.
- Bailout conditions pushed Greece’s economy back in recession with its -0.1% growth in Q1 2017 after already slipping by 1.2% in Q4 2016.
- No details on the components yet, but market players speculate that higher domestic demand and business investment will boost growth even as higher imports weigh on the numbers.
- Euro Zone’s unemployment rate dropped from 9.4% to 9.3% in April, marking the lowest rate since March 2009.
- Employment in the euro zone rose by 1.3% in 2016, higher than the 1.0% seen in 2015.
- Choppy jobs market: Czech Republic (3.2%), Germany (3.9%), and Malta (4.1%) recorded the lowest unemployment rates, while Greece (23.2% in February), Spain (17.8%), Cyprus (11.6%), and Italy (11.1%) continue to drag the region’s figures higher.
- The huge disparities in employment conditions continue to make it difficult for the ECB to pinpoint its policies.
- Annualized consumer prices fell back in May, clocking in a 1.4% growth from April’s 1.9% uptick. Not only does it mark the lowest growth since December, but it also puts more pressure on the ECB to hit its 2.0% target.
- 8 out of 19 euro zone members showed annual inflation rates lower than the region’s 1.9% average.
- No details yet, but preliminary releases show that prices likely grew at a slower pace for most components. Energy prices (4.6% from 7.6% in April) and services (1.3% vs. 1.8% in April) weakened while food, alcohol & tobacco (1.5%) and non-energy industrial goods (0.3%) showed stable growth rates.
- April’s prices were likely artificially boosted by the Easter season activities.
- Decreases due to lower energy prices underscore the ECB’s need to see steady and sustainable price hikes before tightening its policies.
- Euro Zone’s composite PMI might have been unchanged in May, but the manufacturing PMI hitting a 73-month high warrant a second look. Meanwhile, the services PMI dipped to a two-month low in May.
- Manufacturers are dealing with the highest output and new orders in six years, so they stepped up production and hired employees at a pace not seen in the two-decade history of the Markit survey.
- Germany still has the fastest gains in output, new orders, and job creation, but growth is also seen in other countries.
- Job creation in the service sector in May matched its April pace, which extends the sector’s most positive streak since early 2008.
- The surge in demand have pushed selling prices for goods and services higher, but declining input costs hint that the trend could diminish by H2 2017.
- Overall, business optimism is broad-based and is gaining momentum across different sectors and regions.
- Retail sales volume went up for a third consecutive month in March, this time growing by 0.3% against 0.1% growth expectations. However, February’s growth was also revised lower from 0.7% to 0.5%.
- Consumers bought more non-food products (+0.4%) as well as food, drinks, and tobacco (+0.2%) while sales of auto fuel (-0.3%) declined for the month.
- On an annualized basis, retail sales volume grew by 2.3% against February’s 1.8% uptick.
- March’s retail sales numbers show that, at least as of March, the region’s consumers have mostly shrugged off higher inflation.
- Euro Zone’s trade surplus widened to a record high of €30.9B from a year earlier in March, as demand for raw materials, energy, and chemicals surged.
- Exports increased by 13% from a year earlier – the highest monthly jump on record – while imports rocketed by 14% in the same period.
FYI, the EU recorded a €10.5B surplus in trade in goods with the rest of the world, about twice the €5.9B surplus seen in March 2016.
- Germany – the Euro Zone’s largest economy – recorded a smaller surplus, but only because the 2.4% annualized jump in imports lorded over the 10.8% increase in exports.
- The region recorded a €30.6B surplus with the U.S. in Q1 2017, higher than the €23.6B seen a year earlier. Somebody tell Trump.
Putting it all together
In its last monetary policy announcement, the ECB said that “the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished.”However, they also emphasized that “The risks surrounding the euro area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside” but qualified that they mostly “relate predominantly to global factors.”
Then, in a Parliamentary hearing earlier this week, Mario Draghi shared that a “fairly substantial amount of monetary accommodation” is still needed to push inflation toward their medium-term target.
As we’ve seen from the indicators above, the region’s economic recovery is gaining momentum. Demand (both domestic and international) is picking up, employers are hiring, and business owners are optimistic. Inflation has also gone up, but, as of March, consumers are mostly shrugging them off.
Next week the ECB members are expected to discuss whether these improvements warrant the start of them winding down their stimulus.
On one hand, the euro zone economic recovery is on track and Macron winning the French Presidential elections has somewhat eased the “downside risks.” However, weak inflation numbers in May underscored the ECB’s need to see steady price increases before they ease the pedal from the metal.
For now, analysts expect the ECB to start with its view on economic outlook. Many believe that Draghi and his gang will recognize that growth is “broadly balanced” instead of having “downside risks” even as they emphasize their commitment to continue with their easy monetary policy.
How about you? What do you think will the ECB do or say next week?