‘Going from strength to strength’: economists respond after eurozone PMIs hit 6-yr high

The eurozone’s economic recovery is showing no signs of abating, judging from IHS Markit’s preliminary purchasing managers’ indices, with France and Germany driving the activity in the bloc to its strongest level in six years.

Here’s what economists are saying about the results, the prospects for economic growth in the bloc, and the chances that the area’s core inflation rate will finally receive a boost:

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said businesses had sent “a clear message of accelerating growth”

The euro area economy is going from strength to strength according to Markit’s survey. Robust new business in both sectors, at a pace close to a six-year high, is the key story, indicating a positive outlook for output in the short term.

ING’s senior economist Bert Colijn said the strong results put upward pressure on its relatively pessimistic 0.4 per cent quarterly growth forecasts:

While political uncertainty in the Eurozone itself and among its larger trade partners continues to be high, sentiment among Eurozone businesses about activity in the coming year continues to improve.

Price pressures also continue to mount as economic growth continues to be robust. Input prices have been rising for some time now and as the economy is picking up, businesses are now passing on the higher costs to the consumer. Even in France, businesses indicated rising prices, which was for the first time as a whole.

It remains to be seen how fast these indications of faster price growth will work through to the core inflation rate. We expect a slow pick-up of core price growth throughout 2017, but given the remaining slack in the labour market, a rise above 1.5 per cent seems unlikely for the moment.

Apolline Menut at Barclays said political worries are not weighing on businesses:

It seems that euro area firms are ignoring external uncertainty (Brexit, Trump policies) as external demand has remained strong so far helped by a weak euro. Meanwhile uncertainty related to French Presidential elections appears to have been shrugged off: French firms are expecting pro-business policies post the May elections, which suggests they do not see a Le Pen victory as a likely scenario.

Overall, today’s solid PMIs have added upside risks to our 0.4 per cent q/q GDP forecast

IHS Markit’s chief UK and European economist Howard Archer thought the surveys may be a little too optimistic:

We suspect that this may slightly overstate the pick-up in Eurozone growth in the first quarter, but expansion of 0.5 per cent quarter-on-quarter looks to be on the cards.

If there are no political earthquakes in the French elections, it looks very possible that the ECB could drop the reference to lower interest rates in its forward guidance at its June meeting. However, we suspect that most Governing Council members will remain unconvinced over the underlying Eurozone inflation situation to go any further than that, especially as there will still be significant uncertainties over the outlook

Stephen Brown, European Economist at Capital Economics was similarly sceptical about seeing much change from the ECB:

On the basis of its past reasonably strong relationship with quarterly GDP growth, an average of the PMI in Q1 appears consistent with a gain of about 0.6 per cent. That would be an acceleration from the 0.4 per cent recorded in Q4 and would be the strongest growth rate since Q1 2015.

In all, some encouraging news for the region. But while the output prices index increased further, there is still slack in the labour market and wage growth is set to remain subdued. As such, policymakers at the ECB are unlikely to be convinced that recent signs of a pick-up in activity will translate into sustained upward pressure on inflation.