Eurozone growth boosts the euro

The Eurozone economy during the first quarter of the year grew by 0.6% according to the latest release of data by Eurostat. The common Gross Domestic Product (GDP) report for Eurozone’s nineteen nations for the period January to March has not only doubled in comparison to the last quarter of 2015, but it was also higher than analysts’ expectations of 0.4%.

But despite the encouraging GDP news, preliminary data also released by Eurostat for Eurozone’s Consumer Price Index (CPI) showed that the region fell back to deflation as the gauge for April was -0.2%. The CPI for the previous month was flat at 0% and even though analysts were not expecting any improvement (-0.1%), the results were marginally not as good. Additional data released by the same source on the labour market revealed improvement as the unemployment rate for March fell to 10.2% compared to February’s 10.4% reading. The unemployment data also beat expectations for a result of 10.3% and the rate now is at a four year low.

The GDP data now show that the economy has returned to growth levels last observed before the beginning of the financial crisis in 2008, and was particularly boosted by the weak oil prices and also the devaluation of the euro. Targeted actions by the Eurozone’s policymakers also helped some of its in-debt nations.

It now looks more likely that the Eurozone might be able to maintain a similar growth rate on a quarterly basis, there are likely to be more fluctuations on upcoming monthly results. Existing global financial uncertainty could weigh further on export volumes, and also on consumer spending. Moreover, the continuous threat of terrorism and the prospect of the United Kingdom to vote for detaching from the European Union might also act as factors against healthier growth.

By excluding the decrease of energy prices by a massive 8.5% during April, the Eurozone’s core inflation for the twelve months to April actually increased by 0.8%. However, the reading was lower than the previous month’s 1% increase and significantly lower than the European Central Bank’s (ECB) 2% inflation target. The ECB remains active in pushing for growth and inflation, in its March monetary policy meeting it has decided to trim interest rates into further negative territory and increased its asset purchasing programme. Its President Mario Draghi several times repeated the ECB’s intentions to act further if necessary.

The EUR/USD was massively boosted by the stronger than expected GDP results as the rate on Friday alone increased by 0.8% and ended trading at a two week high of 1.14433. On a weekly basis, the world’s most popular currency pair soared by 1.9%.

While very low energy prices are a significant factor of the Eurozone’s fall back to deflation, it is not the only one. The bloc’s services inflation nosedived in April to 1% compared to previous month’s 1.4% and keeps the headline inflation well below the target. Some economists argue that the low inflation is a one-off result and that the decreasing oil prices might not continue to have such a high impact. But given the current economic state, how optimistic are you?

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