As anniversaries go the European Union’s 60th birthday celebrations a month ago were, at best, muted. The spectre of Brexit, the first time the union has shrunk rather than expanded, looms as large on the continent as it does in the UK.
Yet the mournful tone and a febrile political mood hide a Eurozone economy – whisper it – in surprisingly healthy shape.
For investors, policymakers and the people of Europe, the question now is whether 2017 might mark the start of a new era of economic growth.
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A recovery has been a long time coming. Growth in the Eurozone as a whole has bumped along at low levels since the sovereign debt crisis that has rumbled on since 2011 (and which is still crippling Greece and led to a ratings downgrade for Italy at the end of last week).
But now leading indicators are showing signs of an economy on the up. Alex Dryden, a global market strategist at JP Morgan Asset Management, says Europe’s nations are starting to see the improvement: “They were in the emergency room; they’re now walking around and feeling much better.”
Unemployment (and particularly youth unemployment) across the Eurozone still remains at levels most developed nations would look upon with horror. Yet the proportion of people out of work peaked at 12.7 per cent in early 2013, and since then has declined steadily to reach 9.5 per cent.
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Likewise, surveys of business bosses show activity hotting up.
The composite purchasing managers’ index (PMI) in Germany, by far Europe’s largest economy, shows activity recently hit its highest level since May 2011, pre-debt crisis. Neither is the recovery limited regionally.
The indicator for the Eurozone as a whole, closely watched by investors and the European Central Bank (ECB), currently stands at a six-year high.
From politics to growth
Europe has already stepped past multiple political obstacles threatening to put it back on the floor, from the Italian constitutional referendum to elections in the Netherlands and Austria.
Now, after a year of Eurozone political risk events only the final round of the French Presidential election on 7 May and the German elections in September remain.
If the elections go off without a hitch it could prove a spur for markets to start seeing the recovery story more clearly.
Dryden says: “I think we’re in a transition where the conversation will move from talking about politics to talking about growth.”
However, there is still some way to go before economists (and headline writers) can declare the Eurozone is truly in growth mode.
The movements of consumer prices in the bloc are instructive: a big rise in volatile oil prices (after oil cartel Opec cut production) drove headline inflation briefly as high as two per cent before it retreated, but with little effect on core prices.
Growth in core inflation remains sluggish, dipping to 0.7 per cent in March. The ECB has repeatedly stressed it will keep its eyes firmly on core price increases before it judges the recovery to be complete.
Ludovic Subran, chief economist at credit insurers Euler Hermes, warns: “We should not mistake the recovery. The good signs are mainly a price effect and there is no stretch on capacity.”
However, companies are also offering creditors slightly longer payment periods, he adds, a sign of increased trust and perhaps even a “risk-on mode” in European industry.
Meanwhile, insolvency numbers are stabilising at pre-crisis levels, indicating the economy could be rediscovering some of its dynamism.
The path to normal
It looks like the start of a return to something like normal. Even consumers are starting to feel better about their prospects, with confidence rising markedly in March. Other indicators, such as increasing retail sales and record new car registrations, suggest this could feed through to demand.
That raises the possibility of the ECB, still stuck to its ultra-loose monetary policy, moderating its position gradually over the next few years.
The disappearance of references to lower interest rates and even a tapering this year towards the end of quantitative easing bond purchases could be among the first signs that the central bank sees more sustainable growth.
Stung by past relapses in the Eurozone economy, economists are wary this time round. Even so, the outlook is growing more upbeat. Howard Archer, chief UK and Eurozone economist for IHS Markit, sums up the cautiously optimistic mood: “For once when you look at the Eurozone the risks are more to the upside.”