Euro area has a glimmer of hope as ECB waits for slowdown response

Bloomberg

Scratch below the surface of the euro area’s dismal economic numbers and there’s a glimmer of hope that things could improve.
While inflation remains in hibernation and factories are seeing orders drop, companies are continuing to hire and consumers are spending more from their rising wages. That’s why European Central Bank officials are showing reluctance to race into action in response to the slowdown sweeping across the region.
Policy makers have long clung to domestic demand as a hope for the economy amid a weaker global backdrop. They’ll have to decide at their meeting in Frankfurt whether it’s still strong enough to sustain growth or if fresh support may be needed.
“Not only is there hope of a cyclical improvement with the consumer still in a healthy shape and external headwinds fading, but this should remain the ECB’s baseline,” said Frederik Ducrozet, global strategist at Banque Pictet in Geneva. “There is no alternative for them in order to move forward with policy normalization, however gradual.”
Updated economic forecasts through 2021 will be crucial to the Governing Council’s assessment. While many officials have flagged sweeping cuts to this year’s projections, they have been less vocal about the medium-term outlook that guides policy decisions.
“A downward revision to the inflation estimate for 2021 would indicate policy makers are concerned that the economic slowdown will translate into weakness in the labor market and slower underlying inflation. However, with job creation ticking along, even as the economy has slowed, we don’t expect any material revisions to the medium term,” said David Powell and Jamie Murray, Bloomberg Economics.
The lowest unemployment in more than a decade has propped up households’ confidence in personal finances. In France, where the mood soured late last year during disruptive public protests, sentiment has rebounded. Firms are increasingly hiring workers on permanent contracts, and consumer spending rose the most in almost a year.
Also on the plus side: German companies are showing tentative signs of improvement after suffering collateral damage from the US-China trade spat. Manufacturers’ export expectations — a gauge for future investment — improved for the first time in five months.