Euro Zone Economy Steams Ahead
Euro Zone Economy Steams Ahead

By Jeremy Gaunt (Reuters)

The euro zone economy kicked off the year robustly, data from the Baltic to the Mediterranean showed, evidence for the European Central Bank that its massive cash stimulus is working but also posing questions about what comes next.

There are risks ahead - some economic, some political - but for now the 19 member states of the euro zone are doing better than many expected.

German inflation came in strongly if slightly below the economic consensus. At 1.9 percent year-on-year, it was the highest since July 2013 and basically spot on the ECB's just-under 2 percent target for the euro zone as a whole.

Spain, the euro zone's fourth largest economy, reported its output grew last year at 3.2 percent, adding to 3.2 percent and 1.4 percent in the previous two years and signaling a strong recovery from a banking-debt crisis and a recession.

Manufacturing confidence in the Netherlands - the fifth largest economy - hit its highest level since 2008. The Dutch central bank then underlined the mood by raising its growth forecast for 2017 to 2.3 percent from 1.9 percent.

Various economic sentiment indexes for the euro zone as a whole came in better than expected. Bloc-wide economic sentiment, for example, hit a near six-year high.

Less heralded were signs of growth among the currency bloc's smaller economies - Lithuania's year-on-year GDP was 3.0 percent in the fourth quarter and Latvia's came in at 2.1 percent, while Austrian inflation accelerated and its purchasing managers' index soared.

The data comes after a week in which other reports showed relatively strong performances continuing into this year from 2016 for heavyweights Germany and France.

"2017 seems to have started on a very solid footing," said Jennifer McKeown, Capital Economics' chief European economist. "The economy is performing (well)."

Euro Zone Headwinds

All this will be good news for the ECB, which has so far pumped just over 1.5 trillion euros ($1.6 trillion) into the euro zone economy to try to stave off deflation and kick-start some growth, along with providing negligible interest rates.

But it will also add pressure on the ECB to pull back on some of its largesse.

German officials in particular take a dim view of the ECB's free spending and its impact on prices, something ING economist Carten Brzeski encapsulated in a note entitled "Return of Germany's economic bogeyman: inflation".

ECB policymaker and Bundesbank chief Jens Weidmann made clear his view last week, saying: "If this price development is sustainable, the prerequisite for the withdrawal from the loose monetary policy is created." .

The ECB, however, has indicated it is in no rush to turn off the taps. Indeed, ECB rate setter Ewald Nowotny pretty much shut down any move soon, particularly about tapering, or easing off its asset-buying program.

"The discussion about our overall economic assessment will probably (take place) in June," Nowotny said on Monday. "But this is not a tapering discussion." [nL5N1FK31F

Part of this is because the ECB wants to see sustainable improvement and does not believe it has evidence of this yet. Some inflation, for example, stems from rising energy prices that will soon have played out in the comparative data.

Similarly, Barclays suggests that growth in Spain will moderate as the positive effects of temporary factors pushing consumption - including a 2015 income tax cut - wane.

But there is also a series of political events that could complicate and even derail the euro zone's progress.

There are a lot of "ifs" involved, but the presidential election in France could result in an administration led by the National Front's anti-euro Marine Le Pen, while a similar anti-euro result featuring the 5-Star movement could occur in Italy.

Greece, meanwhile, has so far failed to get the latest tranche of its third international bailout. Two years ago it almost became the first country to fall out of the euro zone.

The ECB will be mindful of all this despite the increasing growth.

Europe: "Euro Zone Economy Steams Ahead"