Euro zone starts year with solid economic growth, but risks ahead

Euro zone started 2017 by maintaining solid economic growth as a weaker currency boosted orders for goods and services, a survey showed, but rising political risks could soon take their toll.

Growth in Germany's private sector slowed slightly in January but in France activity rose to levels not seen in more 5-1/2 years on expectations the country's presidential election will yield a more business friendly environment. 

Campaigning on plans to cut corporate tax and slash public spending, conservative former prime minister Francois Fillon is leading the polls to win a May 7 runoff in France's two-round presidential election.

But a surge in support for populist and eurosceptic political parties across the continent could rekindle some of the concerns about fragmentation that were evident in 2012, Fitch ratings agency warned.

"Using a composite financial shock of banking, bond and stock markets, we find that the real economic costs would be high in all large euro zone members," said Gergely Kiss, a director in Fitch's economics team.

Uncertainty from rising protectionist sentiments after the Brexit vote in June and Donald Trump's US election win meant economists in Reuters polls have said the bloc does not have enough momentum to withstand any major political change.

Elections are also due this year in Germany, the Netherlands and possibly Italy.

European stocks gained 0.3 per cent as markets were comforted by the euro zone growth data, combined with a 2-1/2 year high in commodity shares and on a 1 per cent jump in Italian stocks following a merger deal for two of its banks.

Momentum maintained

IHS Markit's Euro Zone Flash Composite Purchasing Managers' Index, seen as a good overall growth indicator, only dipped slightly from December's five-year high of 54.4 to 54.3, comfortably above the 50-point line that indicates growth.

A Reuters poll had predicted a modest uptick to 54.5.

"While the PMI edged slightly down in January, this should not be taken as a sign of weakness. Momentum in the euro zone economy remains fairly strong," said Bert Colijn at ING.

Markit said the PMI, if maintained, pointed to first quarter economic growth of 0.4 per cent, in line with a Reuters poll published earlier this month.

A sub-index measuring prices charged spent its third month above the break-even mark although it ticked down to 51.6 from December's 51.7, which was the highest since July 2011.

Any signs of ongoing inflationary pressures, however weak, will be welcomed by policymakers at the European Central Bank who for years have been unable to get prices to rise anywhere near as fast as they would like.

Prices in the 19-member bloc rose 1.1 per cent in December on a year earlier. The ECB wants inflation below, but close to 2 per cent and has bought more than a trillion euros worth of euro zone government bonds, putting cash into the banking system with the aim of stimulating price rises in the economy.

"In all, the survey has brought some more encouraging news. But, as headline inflation rises and political uncertainty damages investment, we still see growth slowing somewhat this year," said Jennifer McKeown at Capital Economics.

Activity in the bloc's manufacturing industry increased at the fastest pace since April 2011. Its PMI was 55.1, up from 54.9 and above the median forecast of 54.8 in a Reuters poll of 48 economists.

An index measuring output, which feeds into the composite PMI, nudged down to 55.9 from December's 32-month high of 56.1.

New export orders, which includes trade amongst member countries, held steady at last month's 54.8, the highest reading since the start of 2014.

"The weakening of the euro provides some tailwind here, as businesses report that stronger new orders in manufacturing are often coming from outside the euro zone," Colijn said.

The PMI for the bloc's dominant service industry slipped to 53.6 from 53.7, confounding the prediction for a rise to 53.9.

But in a sign that growth will probably be maintained in coming months, the PMIs showed an increase in demand. The new business index rose to 53.6 from 53.5, its highest in a year.

Source :Times Of Oman