Euro-Area Economic Momentum Bodes Well for Prices and Jobs

(Bloomberg) -- The euro area’s accelerating economy is translating into faster job creation and stronger inflation pressures.

A key gauge of activity rose to a near six-year high in March, and employment increased the most since July 2007, with hiring picking up both in services and manufacturing. The jump in the headline IHS Markit Purchasing Managers Index compared with economists’ expectation for a decline and the latest reading is in line with a quarterly economic expansion of 0.6 percent. That’s faster than the 0.4 percent pace in the last three months of 2016.

A broadening recovery has so far allowed the currency bloc to weather a period fraught with uncertainties ranging from the U.K.’s Brexit vote to the U.S. administration’s trade policies, as well as upcoming elections in a number of euro-area countries. As momentum gathers and a mostly oil-driven spike in inflation firms, the European Central Bank 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 euro-area factory activity jumped 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 both the French and German economies unexpectedly improved, while in France, selling prices rose for the first time since 2012.

“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.”

Across the region, 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 labor shortages and an acceleration in wages also suggest that a self-sustained pick-up in inflation may be on its way.

Euro-area inflation accelerated to 2 percent in February, the fastest in four years. While that puts the rate effectively in line with the ECB’s goal -- technically just below 2 percent -- ECB President Mario Draghi has consistently said he’s not convinced the upturn is sustainable just yet. His view is reinforced by the core inflation measure, still below 1 percent.

The ECB’s Governing Council holds its next policy-setting meeting on April 27. But 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 euro zone remains very strong,” Julien Lafargue, a strategist at JP Morgan Private Bank in London, said by email. “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 program appear numbered, especially if the outcome of the French elections turns out to be benign.”

--With assistance from Fergal O'Brien

To contact the reporter on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow, Paul Gordon