ECB risks tripping over euro zone’s green shoots
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Francesco Guerrera
LONDON, May 14 (Reuters Breakingviews) -Look who’s back. After a long period of stagnation, the euro zone is starting to experience some growth. Services are leading the way, but if consumers join the party the economy’s pace could wrongfoot the European Central Bank just as it prepares to cut interest rates.
Of late, Europe has been the sick man of Europe. Since 2006, euro zone growth has averaged 1.4% a year, well below the 2.2% recorded by the United States and the 1.8% achieved by all advanced economies, International Monetary Fund data show. The IMF expects this poor performance to continue this year, with euro zone GDP growth of 0.8% versus 2.7% for the U.S. and 1.7% for advanced economies.
Yet some green shoots of recovery are beginning to sprout. The euro zone Purchasing Managers’ Index — a survey of activity at around 5,000 companies by S&P Global SPGI.N — hit the highest level in 11 months in April. That was due to a jump in services activity, which grew faster than in the United States for the first time since May 2023.
Admittedly, manufacturing output is still declining, while consumption has been flat. The former is hostage to the struggles of key export markets such as China. Consumer expenditure, though, could pick up soon. Boosted by a 5.9% rise in compensation, household disposable income adjusted for inflation rose 3% year-on-year in the last quarter of 2023 according to Holger Schmieding at Berenberg. He estimates further growth of at least 2% in both 2024 and 2025. So far, euro zone citizens are stashing this cash away — the bloc’s saving rate was 14.7% in the last three months of 2023, more than four times the U.S. level.
But if consumers start spending more, the euro zone may grow faster than the ECB’s forecasts of 0.6% in 2024 and 1.5% in 2025. That would pose a dilemma for ECB President Christine Lagarde. She is odds-on to lower interest rates next month. But markets expect two more cuts this year, according to derivatives prices collected by LSEG, and are betting on easier policy in 2025 too.
Wages and the prices of services have been key concerns for Lagarde and her colleagues as they try and guide inflation back to their 2% target. Should those two factors drive a recovery in the euro zone, the case for looser ECB policy would weaken.
A faster recovery in Europe would make it more difficult for Lagarde to persuade her hardline colleagues to repeatedly cut rates. But given how far the euro zone lags the United States, that would still be the right course of action.
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CONTEXT NEWS
The euro zone recovery is gathering pace, led by the service sector, according to the latest surveys of business activity. The bloc’s Purchasing Managers' Index for services rose from 51.5 in March to 53.3 in April, S&P Global said on May 6. The overall PMI index rose from 50.3 in March to 51.7 in April. A level above 50 denotes an expansion.
Europe's services activity is growing faster than in the US Europe's services activity is growing faster than in the US https://reut.rs/44FU851
Editing by George Hay and Streisand Neto
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