Amid the attention in the upcoming Article 50 and the data on private sector business activity, the European Central Bank revealed that surveys pointed to a robust growth momentum in the first quarter of 2017. Does it mean a full recovery of the economy is expected after the notorious impact of Brexit?
The central bank of Europe raised the bar with a huge anticipation for the improvement of the European economy in the last three months. Based on the report released by the ECB on its website, the euro area economic expansion is continuing and is supported by domestic demand, hype of private consumption, low level of unemployment, growing housing market, and expansion of business investment and exports. In-line with this, the European Commission’s Economic Sentiment Indicator (ESI) and the composite output Purchasing Managers’ Index (PMI) both displayed long-term average levels.
Note: Chart taken from www.ecb.europa.eu
“The March 2017 ECB staff macroeconomic projections foresee euro area real GDP growing by 1.8% in 2017, 1.7% in 2018 and 1.6% in 2019. The risks surrounding the euro area growth outlook have become less pronounced, but remain tilted to the downside and relate predominantly to global factors,” In light of this positive outlook, a stronger global recovery and firm domestic demand are highly anticipated.
Meanwhile, the consumer confidence remained strong, reaching above its long-term average in the first two months of the year. It is reasonable that there could be a firm underlying consumer spending dynamics in the near term as household income gains supported by improving euro area labor markets will likely continue to boost the growth of private consumption in general.
Sending optimism in the economy, the number of unemployed hit the lowest rate at 9.6 percent in January. The unemployment has successfully dropped for 14 consecutive quarters already, and improvement was reflected in the positive trend in February, excluding the construction sector which remained fixed.
Further, the housing market is recovering as the number of countries having upbeat growth rates on a yearly basis continue to ramp up. The ECB concluded on its economic bulletin that the higher confidence in the construction sector and the growing number of permits issued building permits contribute in the pickup of construction investment in 2017.
In terms of the business investment, the European Commission’s survey in the first quarter of 2017 showed that demand as a perceived constraint on the production of capital goods has fallen further and remains at the lowest level since the onset of the Great Recession. “The increase in profits of non-financial corporations should encourage investment, particularly in the light of the need to replace capital after years of subdued fixed capital formation.”
Despite the emerging concerns on the trade relationship after Brexit, euro area goods exports have outpaced global goods imports in the fourth quarter of 2016. There could be a possible gain in euro area export market shares against the backdrop of a depreciation of the effective exchange rate of the euro. Since January, the euro has traded from 1.04354 to 1.07900 against the US currency as the ECB keeps its official cash rates unchanged. It turned out, the surveys and new export orders with a bearing on the first quarter of 2017 point to improving export momentum in the near term.
Elsewhere, the Euro zone is set to release its private survey data on private sector business activity on Friday. The trading relationship of the members of the European Union and the Great Britain will be in the eyes of the market players before and after Prime Minister Theresa May triggers Article 50 on March 29. The impact of the “total exit” of Britain would be on the plate of the European policy makers in the coming days, which may bring headwinds in the middle of economic recovery and may put pressure on the currencies.
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