Eurozone Recovery Gathers Momentum

By Paul Hannon 

        The eurozone's modest economic recovery gathered further momentum in March, as Germany led the fastest increase in private sector activity since May 2011, according to surveys of purchasing managers.
        The surveys add to other signs that the eurozone economy is finally emerging from a long period of near stagnation, aided by lower oil prices, a weakening euro, and firming confidence following the European Central Bank's launch of a new stimulus program.
        The surveys underlined, however, the scale of the challenge facing the ECB, since they showed that businesses continued to cut their prices as 2015 began, an indication that the eurozone won't soon escape a lengthening period of deflation.
        "Certainly the ECB won't be popping open the champagne in the Eurotower just yet," said James Ashley, an economist at RBC.
        The ECB on March 9 launched a program of quantitative easing in which it will buy more than one trillion euros of mostly government bonds by September 2016, using newly created money. Its main goal is to lift the inflation rate to just under 2%. In February, consumer prices were 0.3% lower than a year earlier.
        Data firm Markit, which surveys more than 5,000 businesses across the eurozone, said Tuesday its composite purchasing managers index--a measure of activity in the manufacturing and services sectors--rose to 46-month high of 54.1 in March from 53.3 in February. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.
        The surveys indicated the pickup in activity is likely to be sustained, with new orders rising at the fastest pace in almost four years. In response, businesses hired new workers at the fastest rate since August 2011, although it will likely take many months to return unemployment to precrisis levels from the 11.2% rate recorded in January.
        Germany led the eurozone's modest pickup in the final three months of 2014, and is set to continue to perform that role this year. While the surveys showed that activity in the eurozone's largest economy increased at the fastest pace in eight months, the French economy slowed.
        The eurozone economy grew at a quarter-on-quarter rate of 0.3% in the final three months of last year, up from 0.2% in the third quarter of 2014. While the surveys of purchasing managers and other evidence points to a further pickup in the first quarter of 2015, it is likely to be equally slight.
        The Organization for Economic Cooperation and Development last week raised its growth forecasts for the eurozone, and now expects an expansion of 1.4% in 2015 and 2.0% in 2016. By comparison, it expects the U.S. economy to grow by 3.1% and 3.0% this year and next.
        "The survey provided some encouraging evidence that the recovery has not yet been derailed by the Greek crisis," said Jennifer McKeown, an economist at Capital Economics. "But at this rate, it will be a long time before the vast amount of spare capacity in the eurozone economy is fully eroded and the threat of a prolonged bout of deflation lifts."
        There were signs that deflationary pressures may be easing. The costs paid by businesses rose at the fastest pace since July 2014, with purchasing managers reporting that the euro's depreciation had pushed up the price of imports, while staff costs had also increased.
        The pickup in the eurozone economy contrasted with developments in China, where a similar gauge recorded a decline in manufacturing activity.
        Signs of a strengthening eurozone recovery will be welcomed by U.S. policy makers.
        U.S. Federal Reserve Vice Chairman Stanley Fischer said Monday he broadly supports economic-stimulus efforts undertaken by major foreign central banks and is unworried for now about how that is affecting the dollar, in remarks that reiterated the Fed is on track to raise short-term rates this year.
        "Our main interest is that the European economy, and the Japanese economy and the British economy recover," Mr. Fischer said. The U.S. "will be better off if they are growing faster," and stimulus measures undertaken by these banks to spur growth are something we "fundamentally support," he said in remarks before the Economic Club of New York.
        The early success of the ECB's stimulus program has raised questions about how long it will last, reflected in an appreciation in the euro against the U.S. dollar over recent days. In response to that speculation, ECB President Mario Draghi reiterated on Monday that QE will continue until September 2016.
        Write to Paul Hannon at paul.hannon@wsj.com
        Corrections & Amplifications
        The eurozone economy grew 0.3% in the fourth quarter. An earlier version of a Market Talk item that accompanied this article incorrectly said the eurozone economy grew 0.3% in the first quarter.
        (END) Dow Jones Newswires

        March 24, 2015 07:55 ET (11:55 GMT)

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