Euro-Area Confidence Shows Economy Ready to Repel Threats

(Bloomberg) -- Put aside the dark clouds of Greece's debts and the French elections: Economic confidence at the highest level since 2011 suggests that the euro-area economy is in better shape than it's been for years.

While just a year ago European Central Bank officials were debating easing policy further, the tables could now be turning -- though to be sure Brexit, the state of Greek finances and a wave of populism in some nations remain formidable threats. Capturing the shift in tone, Bundesbank President Jens Weidmann said market expectations for an interest-rate increase in 2019 didn't sound “absurd.”  

The index on Monday showed a measure of economic sentiment rose to 108 from 107.9, a sixth straight increase, and figures later this week may also confirm the improvements in the 19-country bloc. It will be the last major batch of statistics for ECB officials to consider before their March 9 policy decision, when they'll also unveil their latest forecasts.

Data on Thursday will probably show consumer prices rose an annual 1.9 percent in February, essentially meeting the central bank's price-stability goal of just below 2 percent for the first time in four years.

While officials including Weidmann argue that the time to talk about an exit is coming closer, ECB President Mario Draghi contends that extraordinary stimulus -- record-low interest rates coupled with a 2.3 trillion-euro ($2.4 trillion) quantitative-easing program -- is still necessary to produce a sustained pickup in inflation. Underlying price pressures remain subdued, and the core rate is expected to have stayed at 0.9 percent this month.

Falling unemployment and weak inflation in recent years have provided a boost to consumption and a support to growth. In addition to stronger confidence, the jobless rate is at its lowest since 2009. Yet the youth unemployment rate is still twice as high, and a pickup in inflation could erode real incomes. 

Moreover, growth in three of the bloc's five largest economies fell short of expectations in the final three months of the year and Greek output unexpectedly contracted, highlighting ongoing fragilities in the region.

Against that backdrop, ECB Executive Board member Peter Praet stressed the recovery is still reliant on accommodative policy. “We cannot see the situation as fully satisfactory,” he said in London on Feb. 23.

Still, a broad measure of euro-area economic activity unexpectedly rose to the highest level in almost six years in February, with national Purchasing Managers' Indexes showing that France outpaced Germany for the first time since 2012. This could signal growth in the euro region is becoming more broad-based. Final readings from IHS Markit for those gauges are due on Friday.

--With assistance from Andre Tartar

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss, Jana Randow