ECB Still Behind the Fed Even With Euro Area Outpacing U.S.

(Bloomberg) -- The euro-area economy had a great start to the year, growing faster than the U.S. -- but that says more about the currency bloc's late recovery than American weakness.

The euro is trading at the strongest in more than six months against the dollar as prospects for the region's expansion continue to improve. Yet the world's two largest economies are also at very different stages. 

Eight years of almost uninterrupted U.S. growth have allowed the Federal Reserve to start raising interest rates, while the younger recovery in the 19-nation bloc has only just reached a point at which the European Central Bank is comfortable even discussing unwinding stimulus. ECB President Mario Draghi will give more clues on the outlook at the rate decision on Thursday. The Fed meets next week.

“In the European chapter, we have turned a page,” said Anatoli Annenkov, senior economist at Societe Generale SA in London. “The recovery is quite firmly grounded on domestic demand, the foreign outlook matters less. We are in a very good position.”

None other than the world's largest asset manager has raised a warning flag over the U.S. economy, arguing that companies are unlikely to step up investment until they gain clarity about Donald Trump's political intentions and his clout to push them through. That means “Europe will grow as fast as the U.S. if not faster this year, which is a big surprise,” BlackRock Inc.'s chief executive Larry Fink told investors late last month.

Most forecasters don't agree with Fink. The Organization for Economic Cooperation and Development said on Wednesday that the U.S. will grow 2.1 percent this year, compared with 1.8 percent for the euro area. The ECB and the Fed will publish updated projections this month.

The U.S. economy rebounded quickly from the Great Recession and has since grown an annualized average of 2.1 percent a quarter, with employment now exceeding the pre-crisis peak by 5.5 percent.

The euro area is finally catching up. Even though the debt crisis that followed the financial meltdown has eroded growth potential and people are still struggling to find work, sentiment among business executives, consumers and investors is close to the highest in a decade, underpinning arguments that the recovery is becoming increasingly solid and broad.

Draghi has acknowledged that downside risks to the economic outlook are diminishing, laying the ground for a gradual shift in stance as early as this week, when policy makers gather in Tallinn for one their regular out-of-Frankfurt meetings.

The biggest challenge -- and not just in Europe -- is subdued inflation. 

For the ECB, fresh forecasts through 2019 may be key in determining whether momentum in price growth -- and the economy -- is strong enough to start making plans to unwind asset purchases and eventually raise interest rates.

At the Fed, policy makers will have to decide whether a recent setback in inflation and uncertainty about Trump's tax reform and infrastructure-spending plans may warrant a reassessment of the current road map that envisages three rate increases this year and potentially a reduction in the balance sheet.

“It's too early to write an obituary for the U.S. economy,” said Bernd Weidensteiner, U.S. economist at Commerzbank AG in Frankfurt. “The broader economic environment is not that bad, but one has to acknowledge that the recovery is already relatively mature. It's normal that some of its cyclical elements are running at a slower pace.”

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Paul Gordon