Eurozone data show continued improvement
Growth, inflation and unemployment all heading in the right direction.
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Following more positive signals from leading private business surveys in recent months, official data today confirmed that the eurozone economy continues to go from strength to strength.
The early/flash estimate of eurozone GDP growth showed an acceleration in economic activity to 0.5% quarter-on-quarter in the fourth quarter of 2016, compared to 0.4% growth in the previous quarter. For the whole of 2016, GDP grew by 1.7% compared to 1.9% in 2015 and 1.2% in 2014.
Separately, inflation data for January showed prices are rising at their fastest pace since February 2013. The harmonised index of consumer prices (HICP) is estimated to have risen sharply to 1.8% year-on-year in January, compared to 1.1% in December, and by more than consensus expectations of 1.5%.
The main cause of the rise is the passing of base effects caused by low energy prices at the start of 2016, but also rising food price inflation. When excluding food, energy, alcohol and tobacco, core inflation is still low at just 0.9% year-on-year – unchanged from the previous month’s estimate. This suggests that the spike up in inflation is likely to be temporary, and policymakers should not attempt to tighten monetary policy in reaction.
While we do not expect the European Central Bank to change its policy stance, we do expect a more vigorous discussion of policy in coming months, with particular pressure coming from representatives from northern Europe.
While the rise in inflation is encouraging and reduces the risk of deflation becoming embedded, inflation also reduces the purchasing power of households. Fortunately, the fundamentals of the eurozone recovery look solid as highlighted by the latest fall in the eurozone’s unemployment rate.
Unemployment falls further
Unemployment fell to 9.6% in December, compared to 9.7% in the previous month, or 10.5% in December 2015. While wage growth generally remains subdued, strong employment growth has been helpful in boosting the disposable income of the household sector in aggregate.
Overall, this is a good set of figures for the eurozone, which stands the monetary union in good stead to deal with the political uncertainty ahead of the Dutch, French, German and possibly Italian elections this year.