The pace of expansion of production activity in the euro area in February was weaker than expected, as growth in the energy sector could not make up for the decline in production of consumer goods and capital goods.
In annual terms, growth slowed to 2.9% against the forecast of 3.6%, while in monthly terms, the uptick averaged 2.9%. Given the relatively soft policy of the European Central Bank in QE, data indicate a strong dependence of production activity on orders from abroad and the dynamics of energy prices. Domestic consumption remains weak despite a massive infusion of liquidity into the economy, so the normalization of the monetary policy of the ECB remains a big question.
Unsatisfactory production dynamics in February was the result of a reduction in production in almost all industries – intermediate goods, capital goods, long-term and immediate consumption goods, except for energy, where output increased by 6.8%, after rising 1.1% in January. This may indicate that producers expect further growth in energy prices, seeking to take advantage of the weakness of the oil market. The current dynamics of oil prices confirms this assumption. In annual terms, the energy sector increased production by 5.7% in February after a decrease of 8.9% in January.
Optimism in production was clearly visible in 2017 and the growth of investment activity allowed the ECB to move to more aggressive rhetoric, including the transition to a curtailment of the asset purchase program. However, the deterioration of the leading indicators, for example ZEW economic sentiments, indicates that the ECB may lose a key support in maintaining the hawkish tone:
Actually, therefore, now there is such a cool attitude to the euro, which against the background of risks associated with the dollar, “stuck” in the range of 1.22-1.23. In the light of the dependence of the production of the eurozone on export orders, it will be harmful for ECB to issue comments that will drive real yields with the US to parity, which will cause capital inflow and, as a consequence, the strengthening of the euro, and therefore a blow to the corporate reporting of eurozone companies.
Minutes of the Fed meeting.
The Fed’s “Minutes” of the March meeting, at which officials unanimously supported the rate hike by 25 percentage points, showed high confidence in the continuation of the growth of the US economy and acceleration of inflation. However, the concern also creeped in the report about Trump’s protectionist policy.
“All participants agreed that the outlook for economic growth has improved in recent months,” the report said. “In addition, all participants expected an increase in inflation in the near future.”
The basic consumer inflation in March actually increased and amounted to 2.1% in March, coinciding with the forecasts. Hourly inflation-adjusted inflation rose stronger than expected-by 0.4% after rising 0.3% in February. The labor market indicators, which is also under the scrutiny of the regulator, slowed somewhat in March after impressive results in February. Nevertheless, the Fed’s preferred inflation indicator Core PCE is at 1.6%, which is below the target level of 2%, so investors are pushing from a moderate forecast to three rate increases in 2018, despite the growth of speculation on four hikes.
Response measures of the countries against which the administration of the White House is going to introduce tariffs, also create downside risks for the American economy, the report says.
In general, the protocol of the March meeting does not trace serious concerns about the existing risks for the US economy and the policy of tightening policy remains confident. For the dollar, this creates some growth potential, which can be realized as soon as there are signs of a retreat of the risks associated with trade wars.