Inflation remains weak in eurozone despite stronger growth

Posted August 01, 2017

Since 2008, UK GDP is 11 per cent higher, compared to 6 per cent higher in the eurozone.

GDP rose by 2.1% in the second quarter of this year in the euro area compared to the same three months the year before, and 2.2% in the whole of the European Union in the second quarter compared to the same quarter the year before.

Growth of consumer price in the euro zone was recorded at 1.3 per cent, which is enough to argue that risk of deflation has disappeared but it is too little to meet Draghi's goal of just under 2 per cent.

Most analysts expect further subdued United Kingdom growth in the second half of 2017 too as consumers continue to feel the squeeze from higher prices and firms hold back from investment due to uncertainty about post-Brexit trade arrangements.

Other data last week showed that, within the eurozone, France's GDP expanded by 0.5 per cent in the second quarter and Spain's by 0.8 per cent.

The pound was boosted after data showing that United Kingdom factory growth rebounded in July on the back of a surge in new exports.

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Job creation quickened, production picked up and order books improved, according to the poll of purchasing managers at more than 600 industrial companies. "It would bring the rate in line with our estimate of fair value and in all likelihood the market will overshoot".

He highlighted particularly solid growth in United Kingdom exports, which have been made more competitive by the pound's sharp drop after the Brexit vote and have benefitted from a strengthening global economy. The Dallas Fed manufacturing index also increased more than expected, rising to 16.8 last month from the 13.0 forecast by economists. "Continued expansion is also still filtering through to the labour market, with the latest round of manufacturing job creation among the best seen over the past three years".

USA job creation surged by more than expected in June and is seen lower but still strong in July, a sign of labor market strength that could keep the Fed on course for a third interest rate hike this year.

"Europe's economy is really doing well, and as a result you should expect monetary policy over the medium term to adjust to that", said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in NY. Strong economic growth should steer the European Central Bank towards reining in asset purchases, but policymakers are still waiting on inflation.

"The global economy has been a jumbo jet running on just one engine for the last five, six years, the US, but now it seems there's more from the euro zone as well, with encouraging signs from Asia too", said James Knightley, chief worldwide economist at ING. Input prices rose at the slowest pace in more than a year, according to the survey.