Eurozone returns to healthy growth after QE bounce – but what next?

There’s a return to healthy growth in the eurozone. Surprised? It’s called the QE bounce. First the head of the central bank says he will inject £1.1tn into the 19-member economic bloc under a programme of quantitative easing (QE).

Next, bank lending gets easier. More importantly, businesses breathe a sigh of relief, realising that after four years of austerity someone has put serious money behind the eurozone’s recovery.

Without downplaying the effect of low oil prices on consumer spending, it is the invisible hand of European Central Bank boss Mario Draghi – working the credit levers to make lending cheaper – that has done the trick.

 So now Italy is back in the growth league with a 0.3% rise in GDP in the first quarter, the same as the UK, while France accelerated 0.6%.

 Dampening the euphoria, German growth more than halved to 0.3% in the first three months of the year from 0.7% in the fourth quarter of 2014. 

More than the UK, Germany is suffering from the fall-off in trade with China and other previously fast-growing areas of the world. That said, the latest figures reaffirm the historic trend for Berlin to report slow but steady growth.

 Overall, the annual growth rate across the currency union edged up to 1% between January and March, from 0.9% in the previous quarter.

With inflation back at zero after four months of negative readings, the eurozone now needs to see unemployment falling before it can say a sustainable recovery is under way across the region. But what is the definition of “sustainable” when it needs zero interest rates and massive QE to move the GDP dial from contraction to expansion?

It is clear markets are betting Draghi will be true to his word and keep the QE funds pumping until at least September 2016. Then what?

 It seems unlikely that the largest eurozone economies will have enough momentum to push ahead without further support. And in the meantime, Greece has gone into reverse and is now officially back in recession.

 Falling GDP compounds all the other problems faced by Athens and means the closing chapter on Syriza’s fight with Brussels is fast approaching.When it happens, it could provide the stability needed to allow even faster growth in the other 18 single currency states.

Unless, of course, the result is a messy exit that undermines the entire euro project, making investors believe other countries might follow. In which case, borrowing costs for all countries will rise and Wolfgang Schäuble’s barely disguised grin will evaporate.

 Germany’s finance minister has argued that a financial firewall around Greece is enough to protect the euro project. Yet political turmoil awaits, as was seen in 2010 and 2012 when Athens burned and its neighbours saw their growth evaporate before being compelled to throw another lifeline.

theguardian.com