June 17, 2017
By Jonathan Cable
LONDON (Reuters) – The deluge of cash poured into the euro zone economy in recent years by the European Central Bank appears to have finally resulted in solid – and more importantly, steady – economic growth, along with rising inflationary pressures.
To borrow a phrase from British Prime Minister Theresa May’s ill-fated election campaign, it’s beginning to look strong and stable.
As well as cutting borrowing costs to rock bottom, the European Central Bank has bought well over a trillion euros of mainly government bonds as part of a battle to drive growth and get inflation back to its 2 percent target ceiling.
At last, the ultra-loose monetary policy appears to be paying dividends. Euro zone growth hit its fastest rate in two years at the start of 2017, and while it has probably slowed a tad this quarter, it remains robust. [ECILT/EU]
This has turned a well-established industry of bemoaning the single currency bloc’s poor performance on its head.
“The ECB’s billions are increasingly filtering through to the real economy. It is somewhat through gritted teeth that we expect two to three further years of buoyant euro zone economic growth,” said Jorg Kramer at Commerzbank.
A flash purchasing managers’ index on the coming Friday will provide the first clue on whether May’s momentum, which suggested quarterly economic growth of 0.7 percent, has carried into June. A Reuters poll predicted it largely has.
“The euro zone has led the developed world upturn, according to the PMI surveys, with the region enjoying its fastest growth for six years so far in the second quarter,” wrote Bernard Aw, an economist at IHS Markit which compiles the PMI surveys, in a research note.
Earlier this month the ECB closed the door on more interest rate cuts, judging the bloc’s economy to be rebounding, but said inflation looks to remain weak for years so it still needs to keep extraordinary stimulus in place.
That stance stands in stark contrast to the United States Federal Reserve. It jacked up borrowing costs for the second time in three months in the past week and said it would begin doing the opposite to the ECB and start cutting its holdings of bonds and other securities this year.
Even in Britain, which is about to embark on two years of talks to extricate itself from the European Union, three of eight policymakers at the Bank of England voted this week to raise interest rates.
The chances Britain ends up outside the single market when Brexit talks are concluded have receded somewhat after last week’s election, although the pound might weaken further against other currencies, a Reuters poll of economists found in the past week.
EU member states meet in the coming week to review the latest developments in negotiations.
May had been expected to win a landslide victory but as voting day approached opinion polls narrowed and in the end May failed to get a majority in parliament.
She had repeatedly said she would be prepared to walk away from negotiations without a deal if necessary. But she now might find that more difficult to do and will have to take a softer line.
“The hung parliament resulting from last week’s election has increased the risk of a slowdown in UK GDP growth due to heightened political uncertainty,” said Jennifer McKeown at Capital Economics.
Britain’s economy slowed more sharply than first thought in early 2017 as consumers felt the hit from rising inflation, official data showed last month, losing a lot of its momentum of last year.
In a light week for economic data, public borrowing numbers for the UK will be the main release where a small improvement is predicted, but with growth risks moving to the downside further major improvements may be difficult to achieve.
Otherwise, U.S. home sales reports are the coming week’s key data, with a slight pick up in housing starts predicted.
Fed Vice Chair Stanley Fischer and New York Fed William President Dudley, along with several other Federal Open Market Committee participants, will speak on monetary policy, possibly offering more clarity.
Wall Street’s top banks brought forward their expectations for when they think the Fed will begin reducing its $4.5 trillion bond portfolio to as early September, and see balance sheet reduction as more of a priority than another interest rate rise, a Reuters poll showed. [FED/R]
Central banks in Mexico, New Zealand, the Philippines and Taiwan also meet in the coming week.
(Editing by Jeremy Gaunt)
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