Mario’s magic is working: Eurozone GDP set for best quarter since 2011

April 1, 2015, 10:30 AM UTC
European Central Bank President Mario Draghi smiles as he arrives to deliver introductory remarks in front of the Economic and Monetary Affairs Committee at the European Parliament, in Brussels, on March 23, 2015. AFP PHOTO / EMMANUEL DUNAND (Photo credit should read EMMANUEL DUNAND/AFP/Getty Images)
Photograph by Emmanuel Dunand — AFP/Getty Images

The European Central Bank’s defibrillator for the Eurozone economy appears to be working: the economy is growing at its fastest rate in nearly a year, and the threat of deflation, which had everyone spooked only four months ago, appears to be waning, according to surveys out Wednesday.

However, it’s a different story still in China, where a parallel survey showed the manufacturing sector treading water in March, continuing to cut prices and shed labor.

Research firm Markit said its Purchasing Managers’ Index for the Eurozone hit a 10-month high of 52.2, up from an initial estimate of 51.9 and up from 51.0 in February. Activity accelerated in three of the four biggest Eurozone economies–Germany, Italy and Spain, while in France the manufacturing sector continued to contract, albeit at a slower pace.

More than anything else, it’s the fall in the euro since the ECB announced its quantitative easing policy that has helped, making Eurozone exports cheaper for the rest of the world, especially the U.S.. New export orders rose to their highest in 11 months, encouraging manufacturers to hire at the fastest rate in over three and a half years.

Nick Kounis, an economist with ABN Amro in Amsterdam, said the figures suggest gross domestic product will have grown at around an annualized rate of 1.5% in the first quarter, its strongest performance in four years. He also reckons that, with loose ECB policy creating a strong cyclical tailwind, that pace will rise to over 2% in the second half of the year.

There was also encouraging news on the deflation front. The ECB had launched QE mainly because it was afraid that collapsing oil prices, against the background of a weak economy, would create self-fulfilling fears of a destructive downward spiral of wages and prices. Those fears now appear to be on the wane, as companies reported input prices rising for the first time in seven months. Kounis says that the 15% drop in the euro’s trade-weighted exchange rate in recent months “is going to provide a huge impulse for import prices that will prop up core goods price inflation.”

Reflation in progress: the ratio of global prices to the euro's effective exchange rate index suggests the big deflation scare is over, at least for now.
Reflation in progress: the ratio of global prices to the euro’s effective exchange rate index suggests the big deflation scare is over, at least for now. Source: ABN
Source: ABN


There was no such good news out of China, though. Markit’s PMI (produced jointly with HSBC), fell back to 49.6 in March, below the 50 level that reflects constant levels of activity.

Markit’s Annabel Fiddes said job shedding by manufacturers hit its fastest rate since the summer, and noted that companies continued to cut their output prices to keep customers rather than pocket the extra profit margin offered by cheaper raw materials prices. Factory gate prices in China fell at their fastest pace in nearly six years in the first two months of 2015, according to the National Bureau of Statistics.