Tailwind for ECB policy change: Eurozone is sending growth signals again

Tailwind for ECB policy change
Eurozone is sending growth signals again

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The economy in the Eurozone appears to be leaving the valley behind it. However, the improvement is currently being borne entirely by the service sector. Things are still going rather poorly in the industry. However, together with other indicators, a reduction in key interest rates is increasingly becoming an issue.

Before the ECB interest rate meeting next week, the economy in the euro area is returning to a growth path. The barometer for the euro zone calculated by the financial house S&P Global rose by 1.1 points to 50.3 points within a month in March. This was the first time since May 2023 that it was above the growth threshold of 50 points, as shown in the survey of around 5,000 industrial and service companies. According to S&P Global, the fact that this was only a mini-growth was due to the fact that the moderate increase in the service sector was almost completely neutralized by the sustained sharp decline in industrial production.

“In March, the inflation dynamics slowed slightly in both purchasing and selling prices. The European Central Bank should be pleased about this,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank (HCOB). Producer prices also continue to fall, signaling to the ECB that inflationary pressure is easing on the way to a turnaround in interest rates. In industry they fell by 8.3 percent in February compared to the same month last year. The statistics list the prices of products ex the factory gate – i.e. before they are further processed or traded. They are therefore considered to be an early indicator of the development of consumer prices.

Falcons probably have the upper hand

With an inflation rate of 2.4 percent, these were no longer far from the ECB’s stability target of two percent: “The path for the first key interest rate cut in June is now clearly marked,” said Bantleon chief economist Daniel Hartmann. Some monetary authorities would probably speak out in favor of monetary policy easing as early as next week, he added, with a view to the interest rate decision on April 11th. However, supporters of a tight monetary policy line, so-called hawks, would still have the upper hand.

According to Austria’s central bank chief Robert Holzmann, the ECB will only have the broad data base required to decide on a change in interest rates in June. April is not on his radar screen because there is not yet enough hard data to make such a decision, said the monetary watchdog, who is part of the hawkish camp in the ECB Governing Council.

The fact that German service providers are growing again is consistent with the somewhat brighter economic picture in the euro area. The purchasing managers’ index for the service sector rose by 1.8 points to 50.1 in March, as S&P Global announced in its monthly survey of 400 companies. This is the highest value in six months. The barometer is therefore just above the growth threshold.

“There is something of a silver lining on the horizon in the German service sector in March,” said HCOB chief economist de la Rubia. “Overall, the service sector has a stabilizing effect on the entire economy.” However, that may not be enough to save Germany from a recession: Gross domestic product probably shrank in the first quarter for the second time in a row.

“Costs are still rising quite sharply in the services sector, but at a much slower rate than last month,” said de la Rubia, whose bank is sponsoring the survey. “This indicates slowing wage dynamics.” At the same time, the inflation rate for the asking prices is even higher. This suggests that competitive pressure among industry players is increasing and their pricing power is decreasing.

“Basically, this is good news for the ECB, which has recently been particularly worried about inflation in the services sector,” said de la Rubia. “But this one month will not be enough to loosen the monetary policy reins in April.”

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