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Euro zone this week: Economy resilient; inflation & employment still a concern

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 8, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - A slew of economic data released this week helped markets to gauge the health of euro zone economy and judge whether or not ECB’s monetary policies intended to spur growth in the bloc is helping to set straight the process of recovery. Data released this week revealed that the euro zone economy has shown significant resilience. The impact of the low interest rates, weak euro and cheap oil seems to have offset the negative impact of the headwinds.

    Inflation remains a concern

    Given that low inflation has been long been the primary concern for the ECB, a discussion on euro zone’s economic status must begin with quoting the bloc’s current inflation figures. Data released on 5th January showed euro zone’s annual inflation stood at 0.2 per cent in December, lower than broad market expectations. The low inflation last month can be attributed to lower prices of food, alcohol and tobacco which increased only 1.2%YoY in December, down from 1.5% increase recorded previously. Energy prices continued to drop, falling -5.9%YoY. Core measure on the other hand was noted to have slowed for the second straight month, slipping to 0.86%YoY from 0.93% previously. Core inflation posted the weakest figure in 6 months. Services price inflation also weakened to 1.1%YoY from 1.2% previously. Further, with oil around $30 per barrel, inflation is set to stay low in the coming months.

    ECB’s smaller than expected stimulus package announced in December had disappointed markets. ECB president Draghi had promised later that the central bank will not hesitate to intensify the easing tools to move inflation to its 2 per cent target as soon as possible. It thus remains to be seen whether the ECB will stick to its commitment of easing further. If inflation continues at this rate, markets might expect an increase in ECB’s asset purchase soon.

    PMI figures

    Closely watched PMI survey revealed this week that growth in the bloc climbed for the first time in four months in December. The Eurozone manufacturing PMI increased to 53.2 in December, up 0.4 points from the 52.8 reading in November 2015. With this, the manufacturing index in the bloc managed to stay manufacturing has stayed above the neutral level of 50 for 30 consecutive months. Italy was noted to be the fastest-growing nation in the bloc along with France, Germany and Ireland. Netherlands, Spain, and Austria however witnessed slower pace of rise. The PMI for service industry came in at 54.2, unchanged from November. The final composite PMI thus touched a four-month high of 54.3 from November's 54.2, higher than an earlier estimate of 54.0.

    The composite output price index for December was also noted to be stable at 49.5. Also, firms added new jobs at the fastest rate since May 2011 with the belief that business will improve in 2016. The employment sub-index came in at 52.8 in December up from 52.2 recorded in the previous month. The good sign is the unemployment rate in the bloc has been declining over the last year. However, the fact that it still stood at 10.7 per cent in October, which is double than the current unemployment rate in the US, definitely raises worry with respect to the employment scenario in the bloc.

    Economic Sentiment

    The European Commission’s economic sentiment indicator (ESI) for the Eurozone unexpectedly increased to 106.8 in December from 106.1 in November, much better than consensus. Except for retail trade sentiment there was marked improvement in all other sectors. Industry confidence increase 1.2 point while the services sector saw a 0.2 point increase. Sentiment was noted to have risen for the third consecutive month. Hiring was strong in manufacturing as well as in services sector. Consumer confidence always moved up from -5.9 to -5.7.Spain 3.4 point increase in sentiment and for Italy sentiment was up 0.4 point. Sentiment remained largely unchanged for both Germany and France.

    The selling price expectations fell in all sectors with the exception of construction. Consumer inflation expectation was also seen to be flat. Thus, any upward movement in price seems a distant dream for the bloc for now.

    The current recovery pace is not adequate to achieve growth targets. Eurozone economy will likely continue to perform below its potential till the time growth environment outside the bloc remains weak. The euro zone economy is expected to grow 1.6% in 2016, after recording 1.5 per cent growth in 2015. Also, given that inflation continues to remain way below the 2 per cent target, the ECB can be expected to revise its inflation expectation down once again. This low inflation will raise pressure on the central bank to ease further in the coming months. The current outlook may justify the central bank’s wait and watch approach for now. Need to step up easing is bound to rise soon as inflation continues to hinder growth in the bloc.
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