Euro-Area Data Maze Leaves Economists Puzzled Over Way Out

(Bloomberg) -- Economists are puzzling over a range of different culprits for the recent euro-area data that point to slower economic growth. What most can agree on is that the trend comes at a bad time for the European Central Bank as it considers exiting ultra-accommodative policy.

Reports on inflation, output, retail sales and German industrial activity all failed to meet expectations this week, continuing the underwhelming start to the year. The data have economists asking whether it’s temporary effects holding the economy back, or whether it mirrors a true slowing of momentum that could lengthen the time frame for the ECB to normalize stimulus.

For policy makers, the possible drop in momentum could complicate efforts to get inflation on track as they prepare to wind down the ECB’s asset-purchase program in September. Economists including Danske Bank’s Piet Christiansen and ING Bank’s Bert Colijn say the data will push officials to maintain a dovish tone, and Christiansen suspects the ECB may even hold off on key policy announcements until a later point than is currently being expected.

Here are the key reasons economists are citing as affecting recent data releases:


IHS Markit, which publishes a gauge of economic activity, blames bad weather for some of the recent loss in momentum, and says April data may offer more accurate insights into underlying growth.


The slowdown in German industrial activity, in particular, may have had to do with “an unusually high level of sickness absence due to the flu,” according to ING-Diba’s Carsten Brzeski, who also sees the possibility of a broader leveling-off in the sector.


Many economists expected inflation data to come out stronger due to higher holiday-related spending, and underlying price pressure components show that services prices indeed picked up, likely due to items such as package holidays.

Stronger euro

What might have canceled out the effect of service-price inflation could’ve been the drop in costs for industrial goods, according to Berenberg’s Florian Hense. He says that could be due to the rise in the euro’s effective exchange rate.

Dead economic models

As the euro area’s unemployment rate continues to decline (it’s currently at 8.5 percent), albeit with no imminent inflation pressures, Danske Bank’s Christiansen says this raises the question “is the Phillips Curve alive or has it changed?” The textbook model stipulates that low unemployment should translate to higher wages and inflation.

Capacity constraints

Higher growth might not even be possible, according to Bankhaus Lampe’s Alexander Krueger, who says that in Germany -- the region’s largest economy -- labor bottlenecks are constraining the ability to handle additional demand.

Calculation methods

Eurostat, which compiles economic data in Europe, as of last month updated the weights used for its calculations from base year 2010 to 2015. That means the relative size of sectors and countries has changed, which may have affected recent releases, says Banque Pictet & Cie’s Frederik Ducrozet.

The ECB’s Governing Council hasn’t yet made its mind up, with some policy makers pushing to adapt communication as soon as possible and others warning against rushing normalization. The next central bank meeting is in three weeks.

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