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Sunday 23 July 2017

ECB remains cautious despite growing confidence in eurozone

Confidence is at a near 10-year high in the eurozone, according to new statistics
Confidence is at a near 10-year high in the eurozone, according to new statistics

Further evidence has emerged that the economy in the 19-country eurozone moved up a gear or two in the early months of the year.

However, with uncertainties remaining over the outcome of the French presidential election and inflation still low, the European Central Bank (ECB) is not expected to signal an end to its stimulus programmes when it wraps up its latest policy meeting on Thursday.

ECB president Mario Draghi is likely to note during his press conference the recent array of good news on the eurozone economy, the latest of which came from a survey by the the European Union's executive Commission.

According to the Commission, economic sentiment across the eurozone is at its highest level for nearly a decade.

In its monthly survey of the region, it said its economic sentiment indicator rose by 1.6 points in April to 109.6, the highest since August 2007, when early signs of the global financial crisis were emerging.

The Commission said the increase was broad-based across sectors, including industry and retail, and across countries, most strongly in the big three of Germany, France and Italy.

The findings echo other recent surveys suggesting that the eurozone economy has picked up steam this year despite concerns related to a run of elections in Europe and Britain's exit from the EU.

Research firm Capital Economics said the Commission's survey "looks consistent with a sharp acceleration" in annual eurozone GDP growth from the fourth quarter's 1.7% to more than 2.5%.

That rate of growth has been common in the United States in recent years but rare in the eurozone, which has struggled with a debt crisis that raised questions over the future of the euro currency itself.

With those financially strained countries - even Greece - now showing improvements in their budgets, there are hopes that uncertainty over the eurozone itself will abate further.

Analysts also think that Mr Draghi will give no sign that the bank is ready to start withdrawing its stimulus in order not to create any uncertainty for markets before the second round in the French presidential election between centrist Emmanuel Macron and far-right candidate Marine Le Pen.

The stimulus entails injecting 60 billion euro (£51 billion) a month into the financial system by buying bonds.

The purchases are set to run at least through to the end of the year, and will run in any case until inflation shows a convincing turn upward towards the bank's goal of just under 2%, considered consistent with a strong economy.

The ECB has also cut its benchmark interest rate to zero, and started charging a fee on deposits it takes in from banks, in effect pushing them to lend the money to business instead of hoard it.

Mr Draghi has said the stimulus is a safeguard against the risk of political events derailing the recovery. The eurozone economy grew by a relatively robust quarterly rate of 0.4% in the final three months of last year, but unemployment remains elevated at 9.5% and annual inflation is still subdued at 1.5%.

Ending the bond purchases would have wide-ranging consequences for governments, investors and savers. It would likely lead to higher long-term interest rates, raising costs for borrowers such as governments and home buyers.

Higher returns on bank deposits and bonds would mean less incentive to put money in riskier assets such as stocks.

AP

Press Association

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