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Further signs of strengthening in the Eurozone

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Summary:

  • German Ifo business climate hits the highest level since 1991
  • Businesses optimistic on economic outlook
  • ECB minutes show members differ on announcing QE end date
  • Eurozone flash manufacturing and services PMI rise strongly in November

The common currency had opened last week on a somber note as reports about the coalition talks in Germany put Angela Merkel in a weak spot.

The euro briefly fell after the news, as the possibility of a snap election emerged. However, the currency managed to recover from the initial decline as economic data from the Eurozone continued to show positive developments.

German Ifo business sentiment hits a new record

The Ifo institute in Germany released its monthly business sentiment indicator. Data showed that business sentiment in Germany reached a new record high. Companies said that they have upgraded their outlook on the economy for the months ahead. This comes amid the political stalemate in the region.

The Ifo’s business climate index was seen rising to 117.5 points. This was higher than the previous month’s (October) reading of 116.8. The November index reading marked the highest level since the records began in 1991. This led the Ifo president Clemens Fuest to comment that the German economy was on track for an economic boom.

However, the Ifo’s survey came in ahead of the coalition talks which collapsed. With the nation currently run by a “care taker government” there is a strong possibility that the business climate index could pull back from the record highs in the coming months.

But economists are hopeful that the political climate will not be too worrying for the businesses in Germany.

Earlier last week, the final revised GDP data for Germany showed that the economy expanded at a pace of 0.8% on the third quarter ending September. This put German annual GDP rate at a pace of 3.3%.

The fourth quarter German GDP is forecast to rise 0.6%, marking a healthy annualized GDP for 2017.

ECB Meeting minutes: Officials differ on QE

The European Central Bank released its meeting minutes last week. According to the report, officials were divided on whether to announce an end date for the central bank’s QE program. Mario Draghi did not set any end date at the October monetary policy meeting.

The ECB had cut QE purchased down to 30 billion euro from January 2018 and is set to continue until September 2018. No further details were announced as the ECB left the options open on the table.

The minutes showed that officials were concerned that leaving the program open ended could lead investors astray. The officials said that the extension of the QE program to September 2018 was not really justified especially in the absence of any major shocks to the Eurozone economy.

Draghi said that ending QE abruptly would be detrimental to the economy. He said that he will not stop QE suddenly and said that it was never the view either. Draghi signaled that QE could continue to extend beyond September 2018 if needs be.

However, with the minutes revealing the internal disagreements between the ECB members, there is a strong possibility that QE could be phased out quickly. Economic data in the Eurozone has so far remained strong with latest indicators suggesting a strong pick up in the GDP.

Inflation however remains the only weak link. After initially rising strongly, inflation has turned flat over the past few months.

Last week’s flash PMI also signaled that the economic momentum was keeping pace. The flash services and manufacturing PMI data showed an increase of 54.9 and 60.0 respectively for the month of November.

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