Tags: Europe | Economy | Eurozone | retail sales

Eurozone Showing Signs of Economic Momentum

Wednesday, 04 March 2015 06:47 AM EST

The 19-country eurozone's economy is kicking into a higher gear thanks to falling oil prices and the lower euro, but the recovery is still far short of that experienced by the U.S.

A brace of economic reports Wednesday point to economic activity picking up momentum after a year of stagnation, particularly in the crucial area of consumer spending.

And that's likely to be welcomed by policymakers at the European Central Bank as they head off for their latest meeting Thursday in Nicosia, the capital of the Mediterranean island nation of Cyprus.

In one of the clearest signals of economic buoyancy, retail sales in the eurozone rose in January by a monthly rate of 1.1 percent. The figure, published by the Eurostat statistics agency, was the biggest increase since May 2013.

January's rise was way more than the 0.2 percent uptick predicted by many in the markets and took the annual rate up to 3.7 percent, the highest since August 2005.

Like most Western economies, consumer spending is a bedrock for economic growth in the eurozone and the fact that it's growing strongly and consistently — up for four straight months for the first time since records began in 2000 — is a positive signal.

"This reinforces our belief that eurozone growth will pick up markedly to 1.6 percent in 2015 as it benefits appreciably from very low oil prices, a much more competitive euro and substantial ECB stimulus," said Howard Archer, chief European economist at IHS Global Insight.

For years, consumer spending in the eurozone has been held back by a number of factors, including high unemployment in many countries, muted wage growth, budgetary restraint by many governments trying to get their public finances into shape, and a general feeling of economic uncertainty.

Now, despite recent concerns over Greece's future in the eurozone, consumers appear to be gaining confidence. Falling unemployment — though still relatively high at 11.2 percent — is helping to boost spending, as is the sharp decline in fuel prices, which has been the main reason why inflation rates have turned negative.

Many economists have warned of the impact of falling prices on consumer spending. A sustained period of so-called deflation can be a huge brake on an economy — as evidenced in Japan over the past couple of decades — if consumers delay spending in anticipation of cheaper products down the line and investors reduce investment in the wake of falling profits.

So far that doesn't appear to be happening in the eurozone and that's probably due to the fact that the main reason why inflation is negative is because of lower energy and fuel costs — money saved at the pump feels like a tax cut for the average consumer to be spent elsewhere.

A separate report on Wednesday found the eurozone economy grew in February at its fastest rate in seven months with the lower euro helping confidence. The euro has fallen sharply in recent months and is trading at around 11-year lows against the dollar.

Markit, a financial information company, said its monthly composite purchasing managers' index — a broad gauge of economic activity — rose for the third month running to 53.3 points in February from 52.6 the previous month, with new factory orders doing particularly well.

Though down from an initial estimate of 53.5, the index is at its highest level since July, 2014. Anything above 50 indicates expansion. Markit says the February survey suggests the economy grew by a quarterly 0.3 percent in the first three months of the year, the same as in the fourth quarter of 2014.

Notably, Markit found that economic activity increased across each of the 'big four' eurozone economies — Germany, France, Italy and Spain — for the first time since April, 2014.

Chris Williamson, Markit's chief economist, said the most encouraging aspect of the survey was the signs of renewed growth in France, Europe's second-largest economy. France has been a laggard, with many economists blaming the government for not pursuing enough reforms.

"The outlook has brightened for all countries," he said.

Williamson said activity over the coming months should be helped by a combination of factors including diminishing concerns over a Greek exit from the euro, the weaker euro and "perhaps most importantly" the start of the European Central Bank's 1 trillion-euro ($1.12 trillion) or so bond-buying program.

ECB President Mario Draghi is not expected to announce any new measures Thursday after the central bank's policy meeting. However, his views on the state of the eurozone recovery will be closely monitored in the markets, as will any further details he provides on how the stimulus will work over coming months.

© Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

The 19-country eurozone's economy is kicking into a higher gear thanks to falling oil prices and the lower euro, but the recovery is still far short of that experienced by the U.S.
Europe, Economy, Eurozone, retail sales
Wednesday, 04 March 2015 06:47 AM
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