Tentative signs of life in eurozone economy
The latest eurozone GDP data show that the economy expanded by 0.3% in the fourth quarter of 2014. For the full year 2014, the eurozone economy grew by a very modest 0.9%.
However, this did represent an improvement compared to the GDP declines of 0.6% and 0.4% recorded in 2013 and 2014, respectively. The Q4 data suggest that growth is broadening. Both consumer spending and investment rose by 0.4%.
Net trade also contributed to growth, with exports rising by 0.8%, no doubt helped by the weakening euro. Indeed, but for a fall in inventories, GDP would have risen by 0.5% in the quarter.
The data show Germany was the main driver of eurozone growth in 2014. Its economy expanded 1.6% last year, the best performance since 2011. However, the French and Italian economies continued to perform poorly, with France growing by just 0.4% and Italy contracting by 0.4%.
The other big eurozone economy, Spain, is showing signs of life, with GDP up by 1.4% in 2014.
Survey data for the opening two months of 2015 indicate the eurozone recovery may be picking up some momentum.
The key composite PMI averaged 53.0 in January/February, above the fourth quarter average of 51.5. Meanwhile, the EC Economic Sentiment index averaged 101.8, compared to 100.7 in quarter four.
The German Ifo business sentiment index has also improved, averaging 106.8 in January/February versus 104.5 in the final three months of last year.
Hard data have also shown some improvement recently. Retail sales grew by a very strong 1.1% in January after having already registered their best performance since 2006 in the final quarter of last year. German retail sales were especially strong, rising by 2.9% in January. The labour market is also exhibiting some encouraging signs.
Employment increased in the eurozone last year. The employment component of the composite PMI continued to strengthen in the opening two months of this year. Meantime, the unemployment rate fell for a third consecutive month in January, coming in at 11.2%. This is the lowest level since April 2012.
However, this still represents a very high jobless rate, both by historical standards and compared to other advanced economies. Eurozone monetary aggregates are also showing signs of improvement.
Growth in M3 money supply picked up to 4.1% year-on-year in January, its fastest pace since April 2009. Meanwhile, growth in loans to the private sector is back in positive territory, rising by 0.5% year-on-year in January, its best level since April 2012.
Despite these signs of improvement, the eurozone recovery still faces some significant headwinds. Tight fiscal policy, restrictive credit conditions, on-going deleveraging, high unemployment, and a lack of structural reforms in some economies continue to act as restraints on the pace of activity.
Thus, the recovery is expected to continue to lag behind other major economies. However, there are also some tailwinds that appear to be boosting growth. These include the favourable impact on the economy of lower oil prices, a weakening euro and recent monetary policy easing measures.
These factors are reflected in the marked upward revisions to the ECB staff GDP forecasts for the euro area published last week.
The ECB is now forecasting growth of 1.5% this year, up from 1% previously. It has increased its growth forecast for 2016 to 1.9% from 1.5%, and is forecasting GDP will rise by 2.1% in 2017.
All the indications are that the ECB will maintain its very loose monetary stance despite better growth. Its large quantitative easing bond purchase programme commenced yesterday, with the ECB saying that it will last until at least September 2016.
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