Tuesday, 8 March 2016

Private Consumption, Investment Help Drive Euro-Area Growth

In World Economy News 09/03/2016

An increase in investment and higher domestic spending helped propel the euro-area to its 11th successive quarter of growth even as net trade suffered amid a slowdown in China and other emerging markets.
Gross fixed capital formation increased 1.3 percent in the three months through December, the European Union’s statistics office in Luxembourg said on Tuesday. Consumption in the private sector rose 0.2 percent, while that of governments expanded 0.6 percent. Exports rose 0.2 percent. Overall the economy grew 0.3 percent in the fourth quarter, in line with an initial Feb. 12 estimate and matching momentum in the previous period.
The data comes the day before a hotly anticipated gathering of European Central Bank policy makers begins in Frankfurt. On Thursday, officials are expected to announce still more stimulus in a bid to boost inflation in the 19-country bloc and update their economic forecasts. While ECB President Mario Draghi said in January he expects the economic recovery to proceed, risks to the growth outlook remain to the downside. Consumer confidence, an early gauge of private consumption, worsened at the start of the year.
In light of the stronger investment figure, “you’d sort of hope this is the beginning of a serious upswing, but given what’s happened to confidence in the first two months of the year, it very well might slow down again,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam.
Concerns about the U.K. leaving the European Union or Spain’s struggle to form a new government show “the political climate is not very stable now in the euro zone,” she said. “For a positive investment climate, you need a stable situation.”
Downside Risks
According to a Bloomberg survey, nearly three-quarters of the economistsexpect the ECB to expand monthly bond purchases on Thursday, and all but one see the deposit rate being cut further below zero.
The ECB’s review of stimulus comes “against the background of increased downside risks to the earlier outlook amid heightened uncertainty about emerging market economies’ growth prospects, volatility in the financial and commodity markets, and geopolitical risk,” Draghi said in letter to a member of the European Parliament published earlier this month.
While a drop in the price of oil and other commodities has boosted real incomes in the euro area, thereby facilitating private consumption and shoring up growth, countries as far flung as Saudi Arabia, Russia and Canada are feeling the pain of the raw materials slump. China’s economy has suffered a slowdown, which in turn has hurt other emerging markets.
In a sign the pace of expansion is slowing in the euro area, the purchasing managers index for manufacturing slipped in February, with the price gauge dropping to the lowest in almost three years. The fact that Germany, France and Italy — the region’s three largest economies — reported falling output prices is likely to compound the concern among euro-area officials who are far from meeting their 2 percent inflation goal.
German Production
The Frankfurt-based central bank sees growth of 1.7 percent this year, picking up to 1.9 percent in 2017.
Yet German industrial production jumped by the most in more than six years at the start of the year, in a sign that strong domestic demand may be helping to underpin output in the region’s largest economy even as external trade cools.
“The January industrial production data imply upside risks to German and eurozone GDP growth” in the first quarter, London-based BNP Paribas economist Dominic Bryant said in a note to clients.

Source: Bloomberg