The recent improvement in some key euro zone economic data represents a significant turn in the economy, according to a Reuters poll of economists, although they still see a one-in-four chance of Greece leaving the currency area.
Many of the most important economic data, such as gross domestic product growth, retail sales and the flash purchasing managers index, have beaten expectations. Some have even topped the most optimistic forecasts.
Coupled with predictions that inflation will start rising towards the end of 2015, from below zero percent now, that is likely to bring some cheer to the European Central Bank just as it starts printing money to buy 60 billion euros of mostly government bonds a month.
“(It’s) too early to be absolutely sure, but the signs are more positive, helped by a weaker euro, lower oil price and quantitative easing,” said Hann-Ju Ho, economist at Lloyds Banking Group.
Although economists seem more optimistic now, several in the poll were not sure the recovery would hold pace.
Still, President Mario Draghi appeared confident at last week’s press conference that the ECB’s asset-purchase program had already started working, leading the central bank staff to revise growth and inflation forecasts sharply higher.
The poll of nearly 70 economists conducted this week forecast growth will average 1.3 percent this year, slightly lower than the ECB’s revised projection of 1.5 percent. Prices are expected to begin rising in the fourth quarter.
When asked whether they share Draghi’s confidence the ECB’s quantitative easing (QE) program has already begun to work, a majority of economists, 19 of 31, said yes.
So far, the benefits of the stimulus announcement and actual purchases that started Monday are limited to the euro exchange rate, sovereign bond yields and stock markets.
The euro has weakened more than 12 percent since the start of the year. Yields on German, French, Italian and Spanish debt fell sharply this week, reacting to demand from national central banks tasked with buying the bonds on behalf of the ECB. [GVD/EUR]
European stock markets have also rallied at the prospect of more cheap money and are up 15 percent since January.
But for a meaningful turn in the euro zone economy and for inflation to start rising, much of that stimulus would have to filter through to consumers and businesses.
Lending to households and companies in the euro zone fell by 0.1 percent in January. That is a slower decline than in previous months but still nowhere near the levels required for it to generate new jobs and boost domestic demand — seen as key to lifting the region from deflation.
Unemployment in the currency bloc is over double the rate of that in the U.S. and policy is on divergent paths in the two economies. The ECB is printing money, while the Federal Reserve is expected to raise interest rates soon.
But the risk of Greece leaving the euro area is real. The poll showed there is an almost one-in-four chance of that happening based on a median probability. That is similar to a consensus from last month.
“The political mood in Athens might actually turn in favor of a self-imposed departure if it appears that negotiations are making little headway, and a messy exit seems likely,” said Tom Rogers, economist at Oxford Economics.