Eurozone economy appears robust as inflation pressures mount

AP News
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Posted: Dec 15, 2016 7:26 AM
Eurozone economy appears robust as inflation pressures mount

LONDON (AP) — The eurozone economy is ending 2016 robustly and inflation pressures are growing, a key survey showed Thursday, in a combination that suggests the European Central Bank's stimulus efforts are working.

Financial information company IHS Markit said its purchasing managers' index, a gauge of activity in the manufacturing and services sectors, held at 53.9 points in December, the same as in November. The index, which is subject to revision, is on a 100-point scale, with 50 marking the threshold between growth and contraction.

A more detailed look at the survey shows that inflows of new business, employment and backlogs of work remained strong and that the manufacturing sector offset a slight slowdown in services.

IHS Markit said the index is pointing to quarterly growth of 0.4 percent, which would be the eurozone's highest rate this year.

Though Chris Williamson, chief business economist at IHS Markit, said the survey puts the eurozone economy on a "strong footing" for 2017, he cautioned that there is "clearly the potential for political uncertainty to derail growth."

Next year, there are scheduled elections in the Netherlands, France and Germany. Discussions over Britain's exit from the European Union are also scheduled to commence.

Perhaps more important for officials at the ECB is the intensification in inflation pressures identified by the survey as a result of higher import costs related to the fall in the value of the euro and the recent spike in commodity prices, notably oil. The common European currency has fallen further following the Federal Reserve's rate hike on Wednesday to trade at a 13-year low of $1.0410.

The firm also found that average input prices — those that firms can't control — rose at the sharpest rate for five and a half years. And average selling prices for goods and services rose by their steepest rate for nearly the same period as firms passed on those higher costs to customers.

As a result, the survey is pointing to higher inflation, something that the ECB's bond-buying stimulus program aims to achieve. It is intended to keep interest rates in the markets low, which should boost lending and economic activity, thereby helping prices to rise.

"The upturn is being accompanied by rising inflation — a scenario that will please ECB policymakers," Williamson said.

The ECB, which targets an inflation rate of just below 2 percent, can point to some success, not least from the fact that annual inflation has risen from below zero earlier this year to the two-and-a-half year high of 0.6 percent in November. Last week, the ECB extended its stimulus program through to the end of 2017 but reduced its intensity from March.

Analyst said that if inflation moves toward target over the coming year there will be less need for the stimulus program and the ECB could be in a position to phase it out in 2018.

In a survey Thursday, credit ratings agency Fitch found that for the first time in five years European bond investors see inflation as a bigger risk than deflation.

Fitch is predicting a pick-up in inflation in the wake of the recent rise in oil prices — benchmark New York crude is trading at over $50 a barrel compared to below $30 at the start of the year. However, it expects inflation to remain "well below" the ECB's target through 2018.