Signs of a strong pick up in business activity in Europe are still not enough to allow the eurozone economy to stand unaided according to the president of the European Central Bank.
Mario Draghi, ECB chief, believes that weak underlying inflation and subdued wage growth make it likely that "substantial" stimulus will still be required to bring consumer price inflation back to the central bank's 2% target.
Draghi speaks, euro briefly drops
Speaking before the European parliament in Brussels on Monday, Draghi said: "For domestic price pressures to strengthen, we still need very accommodative financing conditions.”
He added that these financing conditions were themselves “dependent on a fairly substantial amount of monetary accommodation”.
The euro dropped against all its major rivals on Monday and early Tuesday as the knee-jerk reaction suggested lower rates and monetary stimulus would last longer.
But was there really ever any strong evidence to suggest that the ECB's cautious stance was likely to ease in the coming weeks?
If the data and surveys are examined, it's hard to see why inflation remains so entrenched:
- Eurozone GDP is running at a faster pace than the US: 0.5% month-on-month growth in the first quarter; nearly a 2% annualised pace of growth
- In Germany, the eurozone's biggest economy, GDP growth is running at an annualised 1.7%
- While a Reuters poll suggested a dip back to 56.6 for IHS Markit's composite purchasing managers index, May's index matched April's 56.8 – the further above 50, the faster business activity expands
- Manufacturing PMI rose to 57 in May from 56.7 in April; Services PMI dipped back to 56.2 from 56.4, but remained robust
- Germany's Ifo business confidence index hit a record 114.6 in May, with sub indexes for both current conditions and future expectations rising above forecasts
Consumer confidence remains subdued, however. Falling unemployment is not enough to gear up the European consumer as similar stagnation in wage growth as experienced in both the UK and US, saps the will to spend.
Data from the European Commission on Tuesday show that while the business climate and industrial confidence were upbeat, consumer confidence in May was low, just lifting from April’s -3.6 to -3.3.
Greece remains a concern
Meanwhile, fallout remains from Europe's last crisis as bailout recipient Greece looks for further debt relief – a deal that would allow its inclusion in the ECB's quantitative easing programme.
Fears are rising that if a deal cannot be reached, Greece may opt out of its next bailout payment, and risk default.
Greek bond yields have started rising in the past few days, with the 2-year yield hitting month highs around 5.5%, while the benchmark 10-year yield broke back through the 6% level.