E The Euro Area Economy Bounced Back In 1Q19 From A Near Recession In 2H18

The Euro Area Economy Bounced Back In The First Quarter From A Near Recession In The Second Half Of 2018. Low Inflation Rate Is Still A Worry

 “Still, there is a broad consensus that the eurozone will need more than monetary policy to ensure continued growth and stability. Obviously, with interest rates at the zero lower bound, more monetary/fiscal-policy coordination is a must. The eurozone would also benefit substantially from macroprudential policies and better bank-resolution tools, as well as the development of a common capital market.” (Lucrezia Reichlin, The ECB’s Changing of the Guard, Project Syndicate, May 27, 2019)

Amid signs of an unexpected improvement in the Euro Area’s economy in the first quarter, the inflation rate unexpectedly bounced higher in April, pushing the consumer price increase to a six-month high,

The annual inflation rate (y/y) in the Euro Area rose to 1.7% in April 2019 from 1.4% in the previous month. Even this one-month uptick in inflation still leaves the inflation pace considerably below its longer-term (1991 to 2019) average of 2%.

However, a better measure of underlying inflation is the core rate of inflation, which strips out energy and food prices. The Zone’s core inflation rate rose to 1.3% in April from 1% in the previous month, its lowest level for two years.

What accounted for the sharp increase in consumer prices in April?

In April there was a hefty 5.7% increase in energy prices, but as well, Euro Zone GDP picked up at the start of the year, reversing the sharp slowdown of the second half of 2018.

Real GDP in the Euro Area expanded 1.2% y/y in the first quarter of 2019, the same pace as in the previous quarter. However, the first quarterly economic rebound is more accurately seen with simple quarterly GDP change data.

As seen in one of the charts below, the 0.4% increase in Euro-region GDP in the first quarter was twice the pace recorded in the fourth quarter of 2018.

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