Amidst all of the political chaos that has enveloped the world over the past year, the emerging global growth recovery has been gaining scant attention, other than by equity markets.
We were promised, in the aftermath of the Brexit referendum, last June, that the UK economy would experience an immediate, sharp slowdown in growth; I heard numerous US commentators predicting that their economy would go into immediate recession in the event of a Donald Trump presidential victory; the eurozone economy was projected by many to remain in the deep doldrums for 2017, and China to remain a source of deep uncertainty for the global economy.
To date, none of those predictions has borne fruit. Instead, all of the aforementioned regions have been gathering positive momentum. In the final weeks of 2016, and so far in 2017, the economic news from the eurozone has been steadily, albeit not spectacularly, better. However, any good news on the zone has to be welcomed.
Eurozone GDP growth in the final quarter of last year was revised down from an initial estimate of 1.8% to 1.7%, but this does not detract from the fact that the underlying story is gradually improving.
This week, the EU Commission released its winter forecast, and it makes for better reading than it has for some time. The eurozone economy is now forecast to expand by 1.6% in 2017, and by 1.8% in 2018.
Real GDP in the euro area has now expanded for 15 consecutive quarters.
The labour market is reflecting the improved growth environment, with the unemployment rate now down at 9.6%.
The European Central Bank (ECB) has a mandate to deliver inflation “below, but close to, 2% over the medium-term”.
In January, the headline rate is estimated at 1.8%, which, on the surface, could be a concern, given that it is moving dangerously close to 2%. Just a few short months ago, it was hovering around zero and deflation was generally recognised as the bigger threat.
Does this mean that the ECB might be on the verge of moving away from its zero-interest rate policy, which would represent the first bad news for Irish tracker mortgage holders for a long time? I think not.
There is nothing to worry about, just yet, but the cycle will eventually turn.
The headline inflation rate has edged up almost entirely because of the increase in oil prices in recent months. In recent weeks, the price of a barrel of Brent crude oil has moved up through $57, an increase of over 100% since the beginning of 2016.
This is due to increased demand on the back of stronger global growth and a concerted effort by Opec to limit oil supply.
As we know from the fuel pumps in this country, this is reflected in a significant increase in energy prices across the board.
When energy prices are stripped out of the headline, eurozone inflation rate, the underlying rate is a much more sedate 0.9%.
Furthermore, the rise in energy prices does pose a threat to economic growth, because it increases business costs and undermines consumer spending power.
So, rather than boosting real inflationary pressures, it would tend to dampen growth and real price pressures. The ECB should be well aware of this risk and maintain interest rates at current low levels, for the foreseeable future.
There is still a lot of spare capacity in the eurozone economy, but a continuation of current growth trends might have used up a lot of this spare capacity by the end of 2018.
At that stage, the ECB might start to signal a change in policy, but there is still a lot of water to flow under the bridge before that is likely to happen.
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