Euro Area’s Budding Recovery May Be Almost Ready to Blossom

(Bloomberg) -- It’s looking good for the euro area right now and there’s every chance that’s how it will stay.

Germany, the region’s largest economy, started the week off with a surge in business confidence, while Tuesday saw French manufacturing sentiment rise to a six-year high. With a damaging outcome in that country’s presidential elections seen as largely out of the way, the region’s top two economies might have just the environment they need to fully blossom.

Euro Area’s Budding Recovery May Be Almost Ready to Blossom

While politics has dominated much of the year so far, improving numbers in the background point to an upturn in euro-region momentum. It’s something that policy makers at the European Central Bank have had to acknowledge, though they’ve avoided getting carried away for fear of the signal it might send about stimulus. Now, with nationalist, anti-euro candidate Marine Le Pen predicted to lose to centrist Emmanuel Macron in a run-off on May 7, ECB officials might feel more comfortable signaling at least a minor shift.

“Political parties across Europe may be battling on uncharted terrain but the doves and the hawks at the European Central Bank are still fighting the same old battle,” said David Powell, an economist at Bloomberg Intelligence in London. “The recent series of positive economic figures for the euro area have increased the likelihood that hardliners will gain some ground.”

Nevertheless, the busy political calendar will continue for some months, with an election in the U.K. in June that could have implications for Brexit negotiations, one in Germany in September and another in Italy by early 2018.

A third of economists surveyed by Bloomberg before the election said they expect ECB officials to adjust their wording on the balance of risks facing economic growth when they meet on Thursday. President Mario Draghi has said they are “tilted to the downside,” though his colleague Benoit Coeure says he would prefer to describe them as “balanced.”

With signs of stronger activity mounting, the ECB soon might have enough arguments to do just that.

ECB Outlook

Euro-area momentum accelerated to its fastest pace in six years in April, a report on Friday showed, and France even outpaced Germany in a sign that the recovery is broadening.

Belgian business confidence -- considered a leading European indicator given the country’s importance as a supplier of semi-finished goods to German industry -- also improved this month as capacity utilization rates rose to the highest since 2008.

Inflation data due this week might also offer clues on how fast -- or slow -- the ECB might move. Euro-area numbers on Friday -- a day after the ECB announces its policy decision -- are forecast to show core price growth has accelerated to 1 percent for the first time in just over a year. That would be a welcome sign, though policy makers may still maintain that underlying price pressures are too weak.

Of course, there’s still the risk before the French presidential runoff that Le Pen’s support rises, and the ECB may opt to remain on the cautious side for now. Most economists expect the Governing Council to hold off on any policy changes -- such as tweaks to forward guidance -- until June 8.

“The market is now pricing in a ‘President Macron’ scenario with a fairly high degree of confidence,” though a Le Pen victory “should not be entirely discounted,” said Anthony Doyle, investment director at M&G Group in London. “The focus will now shift to the improving euro-zone economy and the prospect of the ECB beginning to withdraw monetary policy stimulus.”