Economy

#Eurozone growth, inflation pick up, but no ECB moves seen yet

Published

9 years ago

January 31, 2017

Euro zone inflation jumped in January, economic growth picked up and unemployment fell to a seven-year low, but the rebound looks unlikely to prompt any early rethink of the ECB's stimulus program as rises in core prices were modest, writes Jan Strupczewski and Francesco Guarascio.

Inflation in the 19 countries sharing the euro accelerated to 1.8% year-on-year, Eurostat estimated, up from 1.1% in December, putting it within range of the European Central Bank's medium-term target of below but close to 2 percent.

It was the highest rate since February 2013.

Core inflation, which excludes volatile prices of energy and unprocessed food and which the ECB focuses on in its policy decisions, was stable at 0.9% year-on-year, however.

ECB President Mario Draghi said last Thursday he would look past energy price fluctuations until underlying inflation picked up in a "convincing" way.

"With core inflation still weak, it seems unlikely that this will cause the ECB to change course" on its bond-buying program, said Bert Colijn, economist at ING bank.

Barring some "serious upside surprise" in core inflation, he did not expect the ECB to start tapering the program until next year.

Energy prices jumped 8.1% year-on-year in January after a 2.6% increase in December and unprocessed food was 3.3% more expensive than a year earlier.

Separately, the statistics agency said euro zone gross domestic product rose 0.5 percent quarter-on-quarter in the last three months of 2016, as expected, for a 1.8% year-on-year rise.

In the whole of 2016, euro zone GDP rose 1.7%, down from a five-year high of 2.0% in 2015.

"We suspect the euro zone may find it difficult to sustain this momentum amid appreciable political uncertainties during 2017 and likely reduced consumer purchasing power due to higher inflation," said Howard Archer, economist at IHS Global Insight.

Archer sees euro zone GDP growth of 1.6% in both 2017 and 2018.

Stronger economic growth also helped bring down the bloc's unemployment rate to 9.6% in December, the lowest since May 2009 before Greece's debt crisis broke out.

"This starts to get closer to figures that would justify more wage pressures, but it seems unlikely that this will happen in a meaningful way in the first half of 2017," Colijn said.

"Nevertheless, the ECB will look at this batch of data with a mix of joy and concern as it does show that the economy is moving in the right direction, but it will probably bring out the hawks early," he said.

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