For First Time In Years, Euro Economy Starts Surprising On Upside
The euro zone economy is sprouting more green shoots than anticipated just as the European Central Bank fires up a money printing program worth more than 1 trillion euros.
An analysis of Reuters polls shows more than half the most important economic reports since the start of the year, as well as data across the bloc's four largest economies, have beaten the consensus forecast and many have topped the highest prediction.
This latest turn, which comes despite concerns over Greece's future membership in the euro and no real respite to conflict in Ukraine, suggests fears of a deflationary spiral in Europe have been overdone.
Germany, Europe's largest economy, is the clear leader. Retail sales growth for January almost tripled the highest forecast and helped propel the wider euro zone figure to over 10 times the Reuters median on Wednesday.
Two other Germany releases – fourth quarter GDP growth and the flash services PMI reading for January – also topped the highest forecast.
Taken alongside average 3.2 percent negotiated pay rises at a time when inflation has evaporated, the data suggest that ECB quantitative easing may soon look like the last thing Germany needs.
Economists point to the greater discretionary income given to consumers by a dramatic fall in energy prices and a significantly weaker euro, partly in anticipation of the ECB's bond-buying program, as key factors.
“Everyone got caught up in the debate of deflation, Greece and the Ukraine crisis and so expectations were quite low,” said Christian Schulz, economist at Berenberg Bank.
“It now seems the deflation story is a positive one for the euro zone since cheaper oil means consumers spend less on energy and have more money in their purse.”
While the Federal Reserve and Bank of England have viewed cheap energy as a boon to their economies, the ECB has fretted that it could entrench deflationary expectations.
In Spain, both the flash manufacturing and services PMI for January beat the consensus, while GDP growth in Italy, which is still contracting, was not as bad as the Reuters median.
Even in France, Europe's second largest economy, the latest industrial output beat the Reuters consensus, while the services PMI data was higher than all predictions.
The ECB will almost surely announce an upward revision to staff growth forecasts at its monthly meeting on Thursday at the same time as giving more detail about its hotly-debated quantitative easing program which commences in March many years after its peers have shuttered theirs.
“In terms of timing the ECB got lucky,” said Schulz. “If it still had to announce it tomorrow, given all the strong data we've had, the backlash, especially from Germany, would have been much more severe than it was in January.”
For now, disinflation remains the prevailing force globally with only a few exceptions. Euro zone inflation for the most part has come in on consensus or weaker than forecast.
But while oil prices have knocked inflation to very low rates, often below zero, simple maths show that once oil stabilizes or begins to regain lost ground, inflation will turn higher.
On top of that, the boost from weak oil and the euro only lasts so long as a boost to activity unless they keep falling indefinitely. Only when those factors drop out of the equation will it become clear whether the recovery is durable or not.
In the meantime, global stimulus keeps piling up.
China's central bank just cut interest rates for the second time since November and India's central bank also cut rates unexpectedly on Wednesday, among a burst of more than 20 often dramatic policy easings from global central banks since the start of the year.
The prevailing consensus is that the ECB's purchases of mostly government bonds, worth 60 billion euros a month and running through September 2016 to start, will be either just enough to lift inflation toward a target of close to but below 2 percent or will need to be extended.
But if the broader euro zone economy is shifting up a gear just as a blast of stimulus is about to take hold, that view may not hold for long.