Pace picks up in eurozone recovery

The recovery in the eurozone economy has gained momentum since last autumn.

GDP data for the first quarter of 2015 shows that the economy grew by 0.4% for the second consecutive quarter. This was up from 0.1% and 0.2%, in the second and third quarters of last year.

On a year-on-year basis, growth accelerated modestly, from 0.9% to 1% in quarter one. There were also encouraging indications that growth had become geographically ‘broader’ in the first quarter.

While there was a slowdown in the eurozone’s largest economy, Germany (0.3% from 0.7%), this was offset by firmer growth in other eurozone heavyweights France (0.6% from 0%), Italy (0.3% from 0%), and Spain (0.9% from 0.7%).

Meanwhile, the expenditure breakdown of the data showed that domestic demand continued to drive growth in quarter one.

Consumer spending increased by 0.5%, while investment recorded a gain of 0.8%. The domestic economy was supported by the reduced level of fiscal tightening and very low interest rates. Meanwhile, export growth slowed modestly in the quarter, to 0.6%, due to weakness in some of the economy’s key trading partners.

In terms of the second quarter, leading survey indicators of activity suggest that the eurozone economy has maintained its improved momentum. For example, the key composite PMI averaged 53.8 in April/May, just above its first-quarter average of 53.3. National-level indicators have also suggested the economy is maintaining its improved performance.

Likewise, ‘hard’ data measures of performance, such as retail sales, have also recorded good figures in recent months. Sales increased by 0.7% in April, following on from another strong increase in the first quarter.

The improved performance of the economy is also impacting positively on the labour market. The unemployment rate fell to 11.1% in April, its lowest level in more than three years. This still represents a high level — both by historical standards and when compared to other advanced economies. The employment component of the eurozone composite PMI is consistent with the unemployment rate edging lower over the coming months.

Inflation data for the region has shown signs, albeit modest, of upward pressure on prices. The HICP measure on inflation recorded its first positive reading in six months, in May, although, at just 0.3%, it still remains subdued.

Meanwhile, monetary aggregates have also been on an upward trajectory, with underlying growth in loans to the private sector at its strongest pace for three years.

Not surprisingly, given the pick-up in inflation and the improved macro data, there has been speculation that the ECB may scale-back or taper its QE programme.

However, the ECB has emphasised that it intends to fully implement its asset-purchase programme. Thus, purchases will continue to run at a rate of €60bn per month until at least September, 2016.

The economy still faces significant headwinds, such as tight fiscal policy, high unemployment and a lack of structural reforms in some economies.

Thus, the ECB continues to view the risks to the economic outlook as “remaining on the downside”.

However, there are also tailwinds — including the favourable impact of lower oil prices, a weaker euro, and the impact of recent monetary-policy easing measures — with interest rates likely to remain at very low levels.

Overall, though, while the eurozone actually outperformed both the US and UK economies in the first quarter, it will still lag behind these economies for the next few years. This scenario is reflected in the June ECB staff forecasts, with eurozone GDP expected to average 1.7% in 2016-17.

Meanwhile, the IMF is projecting that US and UK GDP growth is likely to range between 2.5%-3.0% over the same period.

John Fahey, senior economist, AIB