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Categorized | Economy

Eurozone economic activity hits highest level this year

Posted on November 23, 2016

A closely watched indicator of eurozone economic activity hit its highest level this year in November, indicating that Donald Trump’s surprise victory in the US election and the threat of a crisis sparked by Brexit have yet to dent the region’s recovery

The flash eurozone PMI has reached 54.1, an 11-month high and up from 53.3 in October. The figure, well above the 50 level that marks and expansion in activity, is one of the first signals that the region’s still-fragile recovery is holding up despite a climate of political uncertainty.

Chris Williamson, chief business economist at IH S Markit, which compiles the PMI, said there were “plenty of signs that growth will continue to accelerate”.

“Increasing numbers of firms are boosting capacity as a result of the order book backlog, leading to the joint-largest increase in employment seen this side of the global financial crisis,” said Mr Williamson.

The PMI reading comes ahead of a policy vote at the European Central Bank in just over a fortnight, when officials are expected to lay out what will happen to their quantitative easing programme after its second leg expires in March. While the region’s monetary policymakers will welcome the strong data, they face a quandary in deciding what to do next.

A weaker euro and strong news on the economy suggest there is room for policymakers to start a discussion on slowing the pace of the QE programme from the current level of €80bn a month. The PMI also provided evidence that price pressures could increase in the months ahead with inflation potentially rising from its current level of 0.5 per cent closer to the ECB’s target of just under 2 per cent.

Despite this, many at the central bank will be cautious about removing stimulus at a time when markets remain on edge and the full effects of the shock election result in the US are yet to play out. Vítor Constâncio, vice-president of the ECB, warned last week that rising protectionism and a slowdown in growth in emerging markets could still derail the eurozone’s recovery, which he said remained weak.

The meeting will take place on December 8, just days after Italians go to the polls for a referendum to decide whether to back Matteo Renzi’s calls for constitutional reform. A No vote for the Italian prime minister is expected to lead to his resignation, triggering a crisis that could benefit anti-EU parties.

Government borrowing costs have already risen across Europe as investors bet that a Trump presidency will produce higher growth and inflation. The rise has been steeper in member states with more vulnerable economies, such as Italy. Higher government borrowing costs tend to raise interest rates on loans to households and businesses too.