Eurozone pickup calms French election jitters

A broadening recovery has so far allowed the currency bloc to weather a period fraught with uncertainties ranging from the UK’s Brexit vote to the US administration’s trade policies, as well as upcoming elections in a number of eurozone countries, including France.

As momentum gathers and a mostly oil-driven spike in inflation firms, the ECB is coming under increasing pressure to plan an exit from its extraordinary stimulus.

“The acceleration in growth toward the end of the quarter, as well as improving trends in new business and an increased appetite to hire, suggest that strong growth momentum will be sustained into the second quarter,” said Chris Williamson, chief business economist at IHS Markit.

A gauge of eurozone factory activity rose to 56.2 in March from 55.4 in February and an index of services surged to 56.5 from 55.5. Both are at the highest in 71 months and well above the key 50 level.

The composite measures for the French and German economies unexpectedly improved. “Employers are getting eager to expand their workforce and boost capacity,” said Edoardo Campanella, an economist at UniCredit in Milan.

“Tentative evidence of accelerating wage growth and a stronger pricing power on the firms’ front, coupled with rising energy prices, is translating into higher inflation pressures,” he said.

Across the eurozone, input prices are rising at the fastest pace since the first half of 2011, and in many cases are being passed on to customers, as a weaker euro and higher commodity prices add to producers’ costs.

Signs of labour shortages and an acceleration in wages also suggest a self-sustained pick-up in inflation may be on its way. An expanding eurozone economy could help Irish exporters hit by the slump in sterling to diversify beyond the UK.

Eurozone inflation accelerated to 2% in February, the fastest in four years. While that puts the rate effectively in line with the ECB’s goal — technically just below 2% — ECB president Mario Draghi has said he’s not convinced the upturn is viable just yet. The ECB’s Governing Council holds its next policy-setting meeting on April 27.

However, economists surveyed by Bloomberg earlier this month said policy makers will wait until at least June before upgrading their assessment of the risks to recovery and won’t announce another reduction in bond purchases until September.

“Economic momentum in the eurozone remains very strong,” Julien Lafargue, a strategist at JP Morgan Private Bank in London, said.

“With inflation pressures starting to build up and the survey showing the best employment growth for almost a decade, the days of the ECB’s quantitative easing programme appear numbered, especially if the outcome of the French elections turns out to be benign.” n Bloomberg and Irish Examiner staff