Bert Colijn, Senior Economist at ING, notes that the Eurozone composite PMI increased from 54.4 to 56 in February, indicating that Eurozone businesses continue to defy political uncertainty as new orders pour in and job growth is at an almost decade high.

Key Quotes

“While investors have started to price in some political risk as Eurozone spreads have recently widened to pre-QE levels, businesses do not indicate similar uncertainty. In fact, strong employment growth, increased inflationary pressures and surging new orders are trumping any geopolitical uncertainty for the moment. Both manufacturing - especially in Germany - and services saw gains, making this a broad-based jump in business activity. With domestic demand strengthening and a weaker euro boosting orders from abroad, the Eurozone economy is seeing robust growth for the moment.”

“This paints a different picture than this month’s consumer confidence indicator, which declined for the first time since August. Worries about the general economic situation and higher inflation rates seem to have made the consumer a little more cautious, but the pace of job creation indicated by this PMI release does show that domestic demand growth is still underpinned by strong employment gains for the moment.”

“Still, concerns about political risks do remain on top of mind for many. Whether it is the upcoming elections or the debt crisis in Greece, there are plenty of uncertainties that could weigh on growth in the coming months. While yesterday’s Eurogroup deal marks some progress in the continuing Greek debt saga, Eurogroup head Jeroen Dijsselbloem did mention that getting a deal is no pressing matter as Greece will not have liquidity issues before summer.”

“Businesses also indicated that price pressures increased further in February. The question is when these increased price pressures will start to translate into stronger core inflation, as there has not been much evidence of that so far. We expect core inflation to remain below 1.5% in 2017, but the discussion about rising inflation and the ECB’s exit out of QE is becoming more prominent. We expect more clues about tapering in 2018 after the Dutch and French elections, so this could once again be a good year for Eurozone economists to not take a summer vacation.”