Euro-area economic confidence soars to nearly two-decade high

Confidence in the euro area continued its advance at the end of 2017, capping what was probably the strongest year for the economy in a decade.

The European Commission’s measure of sentiment touched its highest since late 2000 in December. The reading of 116 was above the median forecast of 114.8 in a Bloomberg survey and was based on an improvement in the outlook for industry and services.

After slowly emerging from the bank failures, record joblessness and sovereign debt crisis that marred its last decade, the 19-nation economy has found its feet. Growth in 2017 was probably the fastest since before the financial crisis and momentum this year is forecast to be almost as impressive.

Reports last week showed the region’s economic activity at the end of the year was the strongest in almost seven years, and unemployment continuing to decline. In Spain, the jobless rate is at a nine-year low, while Germany’s is the lowest on record.

Still, despite the European Central Bank’s negative interest rates and asset purchases worth 2.3 trillion euros (USD2.8 trillion) so far, inflation has been slow to stage a convincing return, remaining below the bank’s goal. 

One reason is that, despite the better employment picture, wages have been slow to rise. In Germany, the euro area’s biggest economy, pay talks for metalworkers and engineers this week could be key for determining whether inflation is finally on track for a pickup.

In the meantime, the ECB’s bond buying is set to continue until September. The monthly pace was halved to 30 billion euros from January, but officials have retained an option to prolong or increase the program if needed.

In light of the robust economic backdrop, the ECB’s more hawkish policy makers have been pushing for the program not to be extended again. President Mario Draghi has said strong cyclical momentum and reduced slack has increased confidence on the inflation outlook, though he’s made no commitments on what will happen after September. Catherine Bosley,Bloomberg