Short term impacts of Quantitative Easing, soft energy prices and a weak Euro are playing a positive role in catalyzing the economic recovery. If memory serves us right, the turnaround of the US economy the second largest after the Eurozone, was exasperating and long drawn; Eurozone certainly will not be an exception. Better yet if Eurozone has to make an emphatic statement then it has to resolve the impact of the slow bleeding wounds inflicted by ill performing economies, specifically Greece.
Short term effects are indicative of the partial positive impacts brought about by economic policy decisions. For example, the adjusted Eurozone Manufacturing PMI® has risen to its highest level since April 2014. The 53.2 reading in December was higher than 52.8 reading in November, and is indicative of the positive momentum being developed in the economic zone. Interestingly Greek PMI, also edged above 50, and Italy’s PMI was at an exuberant 55.6. This is welcomed news for the ECB, whose QE program appear to be lubricating the economy. Increase in growth momentum is signaled by the gross domestic product numbers which rose to 0.4% in the fourth quarter up from the 0.3% reading a month earlier. Also the QE program is manifesting well as lending to companies and households across the Eurozone also picked up in November and was up 0.9% and 1.4% on a YoY basis. Yet structural issues appear to be a detraction. For example, the annual growth rate of M3; which includes long term maturity deposits, holding in money market funds and debt securities, lost some momentum and stood at 5.1% in November down from 5.3% in October.
Core inflation, which excludes volatile food and energy prices and also watched by policy opponents of QE, eased to 0.8% in December from a 1% level in October. These numbers give the market room to believe that the ECB may act swiftly and not hold back in cutting deposit rates, further using QE as a tool to entrench its pervasiveness. But monetary easing decision may well be delayed at the behest of strong manufacturing growth and an improvement in lending and job statistics. Household lending, which acts as a leading indicator, rose to its highest level since November 2011 and corporate lending stood highest since early 2012.
Apart from economic fundamentals there is plausible danger on the socio political front. In the long horizon there is also an obscure chance of Brexit from the European Union with the latest YouGov poll indicating that 40% of UK citizens want to leave the EU while 38% wanting to stay. In a broader sense this adds uncertainty to the political and economic wellbeing of the economic zone. There is still time for an inevitable decision, which should hopefully should favor the integration, that is to be made in the referendum 2017. But in the near term Athens government has to push hard with structural reforms by chiefly overhauling the pension system, enact higher taxation and push forward privatization. Economist are of the view that monetary and fiscal divergence has contributed to Greece’s woe. But high debt to GDP ratio of 175% and the recessionary cycle has necessitated these strong measures by donors on the SYRIZA led government. While the middle class has been hit hard by fiscal reforms, farmers, trade unions and even average people are girding for battle to overthrow the required reforms which can lead to social unrest. Only time can tell if the core economies of the Euro 19 have stabilized enough to curtail the contagion of a Grexit, if it were to happen.