European officials aren’t letting a first-quarter slowdown undermine their confidence in the economy, but an upcoming round of numbers may test their view that the winter blues will pass.
Descriptions by various European Central Bank policy makers have ranged from solid to robust and strong when asked about the recent performance. Even after Germany, the euro area’s economic engine, reported that its rate of growth dropped by half, Governing Council member Jan Smets said the region has “strong momentum.” For outgoing ECB Vice President Vitor Constancio, the slowdown isn’t “such an unexpected or serious matter.”
Early indications from the second quarter hint at a rebound after the three months through March were hit by cold weather, strikes, capacity constraints and even a flu outbreak. That still needs to be confirmed in the coming weeks, when key numbers reveal whether businesses and households are coming out of hibernation.
While Europe’s policy makers are putting on a brave face, reactions from the corporate world have been more mixed, with some pointing to pressure from the stronger euro, up 13 percent since the start of 2017. Also, oil prices are the highest in almost four years, though analysis by Bloomberg Economics suggests that $100 a barrel won’t be as big a drag as it was in 2011.
All those releases build up to the ECB’s next policy meeting, when it will have new forecasts that may guide any formal discussion of when to scale back asset purchases. The soundings from officials are that they’re still moving in that direction, though they’ve acknowledged the global risks.
“They have to look through the first-quarter weakness and attribute it to a lot of temporary factors and look more to a global economic environment that’s supportive of growth,” said Kristina Hooper, Invesco chief global market strategist. But they’ll still have to acknowledge that there’s “a heck of a lot of uncertainty out there which suggests caution.”
ECB President Mario Draghi will get another chance to offer his view of the economy when he speaks in Frankfurt on Wednesday. Late last month, he said that growth is “solid and broad-based,” while adding some indicators may suggest a “more durable softening in demand.”
Inflation was 1.2 percent in April, while the core rate was 0.7 percent, according to a final reading from Eurostat published on Wednesday. That’s well below what the ECB would like.
“The euro area slowed in 1Q but there are good reasons to think it will bounce back: Spain and Italy held up well — it was the big economies with bad weather that suffered. And the labor markets had a good 1Q in both Germany and France — there’s no sign of the job shedding you might see if the slowdown were expected to last. The data flow will soon sweeten and the clouds hanging over Mario Draghi and his colleagues will lift. Asset purchases are still likely to end this year, despite the bad start,” said Jamie
Murray, Bloomberg Economics.
The latest questions over the outlook for the economy flared up, as numbers showed that growth in Germany, the Netherlands and Portugal all slowed more than forecast in the three months through March, while euro-area expansion slipped to 0.4 percent from 0.7 percent.
“Growth in the euro zone and Germany is somewhat weaker than originally expected,” German lender Commerzbank said in its interim earnings report. “The firm euro, slightly less lively global demand, rising interest rates and not least the risk of a trade war between the US and China that emerged toward the end of the first quarter all had an impact.”
Continental AG, the German maker of car parts, is among the companies to highlight the euro’s level, saying said last week that its advance is taking a toll on profit. Volkswagen AG
has also flagged the exchange rate as a risk to earnings.