Robust eurozone PMIs turns attention to ECB

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Robust data in eurozone manufacturing and services purchasing managers’ surveys has turned attention to the ECB today, as the region records its best performance since April 2011.

The composite manufacturing and services output index rose to 56.7 in March, completing a strong set of data for the first quarter.

Based on existing data, IHS Markit expects eurozone GDP to expand to 0.5 per cent in Q1, compared to growth of 0.4 per cent in the last two quarters.

French and German activity both improved to a 70-month high.

Howard Archer, chief economist for Europe at IHS Markit, says if there are no political earthquakes when France holds it national elections in April and May the ECB could drop reference to lower interest rates in its forward guidance at its June meeting.

However, Archer does not expect the central bank to start gradual normalisation of interest rates until late 2018.

“We are doubtful there will be conclusive evidence of a marked pick-up in Eurozone wage growth over the next few months at least – which the ECB has identified as a key factor for inflation to rise to its target rate on a sustainable basis,” Archer says.

Regarding the ECB’s asset purchase programme, Archer believes it will not consider making any adjustments until late in 2017, possibly when the German election is out of the way in September.

He suspects the Bank will extend purchases into 2018 and will reduce the rate of purchases rather than suddenly stopping the programme.

The PMIs also showed that employment in the services and manufacturing sectors was rising at the fastest rate since July 2007, which could be an important factor in supporting consumer spending, which is otherwise facing higher inflation and limited wage growth in most countries.

Despite the region appearing on the front foot, Archer warns there is still considerable scope for political uncertainties to affect growth in the coming months, including elections in elections in France and Germany, political fragility in Italy, problems in Greece, and Theresa May’s plans to trigger Article 50 next week.