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By HaleStewart April 15, 2018 8:05 am
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And Overview of the EU

           Peter Praet gave his assessment of the EU region in a speech on April 9.    Let’s begin with his assessment of inflation:

The economic expansion clearly shows that our monetary policy has been effective in laying the groundwork for a return of inflation to a rate below, but close to, 2% over the medium term. Inflation developments remain subdued, however, and we have not yet met the Governing Council’s criteria for a sustained adjustment in the path of inflation, which is our stated condition for ceasing our net asset purchases.

Inflation remains well below the ECBs target:

It hit 2% at the beginning of 2017, but has since drifted lower. 

Here is how Praet described it:

That being said, inflation continues to be lacklustre. After lingering at levels well below 1% for three years, with occasional dips into negative territory, euro area headline inflation increased towards the end of 2016 and has fluctuated, for the most part, between 1.3% and 1.5% since May last year. Annual inflation stood at 1.4% in March, according to Eurostat’s flash estimate. On the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around current levels in the coming months. Measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend.

Praet’s inflation statements are aspirational; ECB polices have “laid the ground work for a return.”  Inflation, as of this speech, was not nearing the ECBs stated goal.  Praet also implies that 2% is a ceiling: “but close to, 2%.”  The implication is that a move above 2% would run counter to the ECB’s goals. 

            Praet places a fair amount of emphasis on sentiment:

The latest economic data and survey results point towards some moderation of late, but remain consistent with strong growth for the first quarter of this year. The composite output Purchasing Managers’ Index – which is closely correlated with growth in the euro area – remains above its long-term average and is close to a 12-year high. Moreover, Eurostat’s Economic Sentiment Indicator is around its highest level for 17 years. While risks to growth can be assessed as being broadly balanced, the international trade environment may have added to the downside. This is also reflected in financial conditions, which have recently tightened while remaining very supportive.

This chart from the latest Economic bulletin puts Praet’s comments into perspective:


Both the sentiment readings began rising in early 2017; the continue to rise today.  The PMI numbers have recently moved a bit lower, but that could simply be a natural drop after several months of increasing data.  Increased sentiment readings move the aggregate demand curve to the right; under IS/LM analysis, they move the IS curve to the right as well, signifying an increase in longer-run output.      

            Preat next describes the labor market:

The ongoing expansion has led to strong employment gains. The number of people employed in the euro area has increased by almost 7.8 million since the trough in mid-2013. This implies that all of the job losses recorded during the crisis have been recovered. The unemployment rate is at its lowest level since December 2008, despite an increase in the labour force of more than 2%.

This chart from the latest ECB Economic Bulletin places these comments into longer-term perspective:

The unemployment rate (in red) started to decline in 2013, but it wasn’t’ until 2014 that the rate of decline meaningfully accelerated.  Employment gains have been increasing since 2013.  Labor market strength has translated into wage gains, which are supporting spending:

…Since 2016 employment growth, together with the gradual increase in compensation per employee, has become the main driver of households’ real disposable income, while the contribution of taxes and transfers has become more negative, as in good times automatic fiscal stabilisers somewhat dampen the growth of real disposable income.

But the wages gains have been muted:

Muted wage dynamics are one important element keeping a lid on underlying price pressures. There is much discussion about the Phillips curve having become flatter in recent years, suggesting that the relationship between economic slack and inflation has weakened. But it is difficult to determine empirically whether changes in the Phillips curve stem from a mismeasurement of slack or from parallel shifts in the curve. In other words, a flattening of the Phillips curve could be confused with a mismeasurement of slack or a parallel shift of the complete curve.

The bottom line is the EU region continues to make forward progress.  The only potential issue on the horizon right now is the trade situation with the U.S. 






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