Economic Growth in Eurozone Appears to Be Gaining Momentum

http://www.nytimes.com/2015/05/06/business/international/european-union-economy-forecast.html

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PARIS — It may not be at escape velocity yet, but the European economy is definitely picking up steam, an official forecast showed on Tuesday, as low oil prices, favorable foreign-exchange rates and central bank stimulus added momentum to a modest recovery.

The European Commission said it was revising upward its forecast for eurozone economic growth this year to 1.5 percent, from 1.3 percent, accelerating from the 0.9 percent growth posted last year. For 2016, the commission predicted that the eurozone economy, composed of the 19 member nations that share the euro, would grow by 1.9 percent.

“Eurozone G.D.P. is likely to beat both the U.S. and the U.K. in the first quarter, the first time since 2011,” Christian Schulz, an economist with Berenberg Bank in London, said before the commission’s new forecasts were announced. “It shows that Europe is becoming normal again.”

He predicted that the eurozone would show first-quarter expansion of 1.6 percent. The United States’ economy expanded a meager 0.2 percent at an annualized rate in the first three months of the year, while Britain’s grew 1.2 percent. But for the full year, Mr. Schulz said, it was probable that the American economy would still grow faster.

Valdis Dombrovskis, the European Commission’s vice president for the euro and social dialogue, said in a statement announcing the revised spring forecasts that European nations needed to carry out additional structural changes, spur investment and encourage “fiscal responsibility.”

The commission said domestic demand was driving growth in gross domestic product, while investment was expected to rebound in 2016. The fall in energy prices that began in June, which appears to have ended, has had the effect of a stimulus for households, enabling them to spend more of their income on other goods and services.

The European Central Bank’s recent policy of large-scale bond buying, known as quantitative easing, has helped by driving down interest rates, and the weaker euro has benefited exporters.

“The eurozone is a large, diversified economy that had been held back by the euro crisis and the E.C.B.’s reluctance to undertake aggressive easing,” Mr. Schulz of Berenberg said. “Now that the E.C.B. has started quantitative easing, the eurozone economy is reacting just like the U.S. and U.K. economies responded when their central banks employed Q.E.”

Mr. Schulz said that with the market on edge over Greece’s lengthy bailout talks, the central bank action has also helped “by acting as an insurance policy, helping confidence.” That is because the central bank could step in to buy the bonds of some of the bloc’s more exposed members if Greece abandoned the euro in messy fashion.

No one is yet ready to declare the European economy out of the woods. Europe formally climbed out of recession about two years ago, but has since oscillated between stagnation and low growth without yet attaining the levels of output it had before the start of the crisis in 2008.

Unemployment remains at a punishing 11.3 percent in the eurozone, official data showed last week, and economists say it is probable that the labor market improvement, when it comes, will be slow.

The commission forecast that the eurozone jobless rate would still be high, at 10.5 percent, in 2016.

The E.C.B. started its bond-buying program after inflation began falling to levels that many economists warned were too low for safety and that were far below its target of slightly less than 2 percent. Inflation turned negative across the bloc late last year, raising fears of deflation, a self-reinforcing cycle of falling prices and poor growth that could have dire effects on banks and borrowers.

The commission said on Tuesday that inflation would “remain close to zero in the first half of 2015,” picking up as the year wore on, as “domestic demand strengthens, output gaps narrow, the effects of lower commodity prices fade and the depreciation of the euro triggers higher import prices.” For the year, it predicted inflation in the eurozone of just 0.1 percent, accelerating to 1.5 percent in 2016.

Mr. Schulz said that some of the most encouraging signs were coming from crisis-battered nations like Spain and Italy, where manufacturing appeared to be bouncing back faster than in many other countries. The two nations have taken tough measures to overhaul their labor markets, and are reaping the benefits now, he said.

“The problems in Europe now are limited to Greece, of course, and among the more normal economies, to France, because of a lack of reform there,” he said.