Europe's economic rebound is unexpectedly robust

According to recent data, the region may begin to see a strong decline in the current 9.5 percent unemployment rate.

First Look

Europe’s economic recovery is showing surprising strength, as key surveys of business activity and optimism hit their highest levels in years.

The data released Tuesday hold out hope that the region is set to see a sustained and marked decline in its unemployment rate from the current 9.5 percent.

And the good economic news could well add pressure on the European Central Bank to signal a withdrawal of its extraordinary stimulus measures.

One of the indicators the ECB looks at when assessing its policy stance is the monthly survey of business activity from financial information company IHS Markit. Once again, it was strong, with the purchasing managers’ index – a broad gauge of economic activity – for the 19 countries that use the euro currency unchanged at a six-year high of 56.8 in May.

The results are consistent with quarterly economic growth of 0.6-0.7 percent, higher than the first quarter’s 0.5 percent growth. Chris Williamson, IHS Markit’s chief economist, says the consensus forecast for second-quarter growth of 0.4 percent may prove “overly pessimistic.”

He also noted that job creation has surged to the second-highest in nearly a decade as firms expand capacity and meet rising demand.

The strong purchasing managers’ survey comes on top of the 26-year high reached by Germany’s Ifo monthly confidence index. It rose to 114.6 points for May from 113.0 in April. Economists had forecast that it would increase, but only to 114.1.

Ifo said that was the highest figure since 1991 and, along with other data, points to growth of 0.6 percent in the second quarter, matching the quarter-on-quarter growth figure of 0.6 percent for the January-March period.

“Today’s strong German data add to the evidence that, not only the German economy, but the entire eurozone economy could become the positive growth surprise of 2017,” ING-Diba economist Carsten Brzeski said. “This sentiment is also spreading across financial markets, with many market participants now realizing that the eurozone economy had been written off too early.”

The eurozone grew 0.5 percent in the first quarter compared to the quarter before, and 1.7 percent compared to the year-ago quarter.

Germany has been the main engine behind the region’s recovery from recession which began four years ago. It’s been buoyed by strong exports of its cars and machinery. Stronger consumer confidence due to low unemployment of 3.9 percent has also supported the recovery.

However, for the region to really push on growth has to come from all corners and a run of surveys are pointing to a pick-up, particularly in France, the eurozone’s second-largest economy.

The strong data mean the eurozone is closer to no longer needing extraordinary stimulus provided by the European Central Bank through its 60 billion euros ($67 billion) in monthly bond purchases. The purchases pump newly printed money into the economy in an attempt to raise inflation that is considered too weak, and to protect the recovery from any new troubles. The bank has said it will continue the purchases at least through year end. Analysts expect more hints about the bank’s future plans at its June 8 meeting and a clear roadmap for tapering the stimulus could emerge in September.

David McHugh contributed from Frankfurt, Germany.