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EU Economic Sentiment Near Six-Year High

2017 seems to have started on a very solid footing with economic sentiment in the 19 countries sharing the euro rising to 108.2 in January
German inflation looks set to come in strongly after five federal states clocked up annual price rises close to—and in three cases  above—the ECB’s just-under 2% target for the eurozone as a whole.
German inflation looks set to come in strongly after five federal states clocked up annual price rises close to—and in three cases  above—the ECB’s just-under 2% target for the eurozone as a whole.

Eurozone economic sentiment edged higher to a near six-year high in January, as the mood in industry, services, the financial sector and among consumers improved, European Commission data showed Monday. 

The commission's monthly survey showed economic sentiment in the 19 countries sharing the euro rose to 108.2 in January from 107.8 in December. This was well above the long-term average of 100 and unmatched since March 2011, RTE reported. 

Economists polled by Reuters had expected a slight dip in sentiment to 107.7. 

Separately, the commission's business climate indicator, which points to the phase of the business cycle, was unchanged at 0.77 points, the highest level since June 2011. 

"The mildly positive developments in eurozone sentiment resulted from improvements in industry, services and consumer confidence which outweighed decreases in retail trade and construction confidence," the commission said in a statement. 

Among the larger countries, economic sentiment decreased in France and very slightly in Germany. It rose strongest in Spain, Italy and the Netherlands. 

Sentiment in industry jumped to 0.8 points from zero in December, above market expectations and well above the long-term average of -6.5. 

Sentiment in the services sector, which produces two thirds of the eurozone's GDP, also rose to 13.5 in January from a revised 13.1 in December, beating economists' expectations. 

Consumer inflation and producer price expectations also rose in January.

This is welcome news for the European Central Bank. The ECB has been buying billions of euros worth of eurozone government bonds on the market to inject more cash into the banking system and make banks lend more to the real economy to boost inflation closer to its target of below, but close to, 2%.

Steaming Ahead

There are risks ahead—some political—but for now, the 19 member states of the eurozone are doing better than many expected, Reuters reported.

German inflation looks set to come in strongly after five federal states clocked up annual price rises close to—and in three cases above—the ECB's just-under 2% target for the eurozone as a whole.

Spain, the eurozone's fourth largest economy, reported its output grew last year at 3.2%, adding to 3.2% and 1.4% in the previous two years, signaling strong recovery from a banking-debt crisis and a recession.

Less heralded, there were also signs of growth among the currency bloc's smaller economies—Lithuania's year-on-year GDP was 3% in the fourth quarter, while Austrian inflation accelerated and its purchasing managers' index soared.

The data comes after a week in which other reports showed relatively strong performances continuing into this year from 2016 for heavyweights Germany and France.

"2017 seems to have started on a very solid footing," said Jennifer McKeown, chief European economist at Capital Economics in London. "The economy is performing (well)."

Headwinds

All this will be good news for the ECB, which has so far pumped just over €1.5 trillion ($1.6 trillion) into the eurozone economy to try to stave off deflation and kickstart some growth, along with providing negligible interest rates.

But it will also add pressure on the ECB to pull back on some of its largesse.

German officials in particular take a dim view of the ECB's free spending and with inflation expected to be higher in Germany, Europe's biggest economy, than across the eurozone as a whole, the pressure will be on.

"If this price development is sustainable, the prerequisite for the withdrawal from the loose monetary policy is created," ECB policymaker and Bundesbank chief Jens Weidmann said last week.

The ECB, however, has indicated it is in no rush to turn off the taps.

For the eurozone as a whole, economists polled by Reuters expect the inflation rate, due on Tuesday, to rise to 1.5% in January after 1.1% in December.

 

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