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Eurozone economy in better shape to repel 2017’s threats

Zurich - Put aside the dark clouds of Greece’s debts and the French elections for a moment: the euro-area economy appears in better shape than it’s been for years.

While just a year ago European Central Bank (ECB) officials were debating easing policy further, the tables could now be turning - though to be sure Brexit, the state of Greek finances and a wave of populism in some nations remain formidable threats. Capturing the shift in tone, Bundesbank President Jens Weidmann said market expectations for an interest-rate increase in 2019 didn’t sound “absurd.”  

A bevy of data this week is likely to confirm the improvements in the 19-country bloc. It will also be the last major batch of figures for officials to consider before the March 9 policy decision, when they’ll also unveil their latest forecasts.

Consumer prices probably rose an annual 1.9% in February, essentially meeting the central bank’s price-stability goal of just below 2% for the first time in four years.

While officials including Weidmann argue that the time to talk about an exit is coming closer, ECB President Mario Draghi contends that extraordinary stimulus - record-low interest rates coupled with a €2.3trn quantitative-easing programme - is still necessary to produce a sustained pickup in inflation. Underlying price pressures remain subdued, and the core rate is expected to have stayed at 0.9% this month.

Falling unemployment and weak inflation have provided a boost to consumption and a support to growth. Economic confidence is forecast to have hit its strongest since 2011 this month, while the jobless rate is at its lowest since 2009. Yet the youth unemployment rate is still twice as high, and a pickup in inflation could erode real incomes. 

Moreover, growth in three of the bloc’s five largest economies fell short of expectations in the final three months of the year and Greek output unexpectedly contracted, highlighting ongoing fragilities in the region.

Against that backdrop, ECB Executive Board member Peter Praet stressed the recovery is still reliant on accommodative policy. “We cannot see the situation as fully satisfactory,” he said in London on February 23.

Still, a broad measure of eurozone economic activity unexpectedly rose to the highest level in almost six years in February, with national Purchasing Managers’ Indices showing that France outpaced Germany for the first time since 2012. This could signal growth in the euro region is becoming more broad-based. Final readings from IHS Markit for those gauges are due on Friday.

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