The eurozone economy has reached an inflection point and indices show the prospect of a gradual recovery

After two consecutive quarters of decline, the eurozone economy reached an inflection point and began to show signs of recovery. According to the latest data released by the European Commission on May 28, the eurozone economic sentiment index rose to 114.5 in May, better than market expectations, hitting a three-year high.

Earlier, Eurostat released data showing that in the first quarter of this year, the eurozone and EU economies fell by 0.6% and 0.4%, respectively, for the second consecutive quarterly decline. This is in sharp contrast to the economic situation in the United States. The U.S. economy grew 6.4% in the first quarter of the year. China also recovered quickly after the new crown epidemic, jumping 18.3 percent year-over-year in the first quarter.

New data released on Friday showed that the Eurozone’s economic sentiment index rose to 114.5 in May from 110.5 in April, beating market expectations of 112.1 and hitting a new high since January 2018. Among them, services, retail trade and consumer-related rose the most, mainly benefiting from accelerated vaccination and the government’s easing of embargo restrictions. Separately, the final Eurozone consumer confidence index rose to a rise of – 5.1 in May, up from – 8.1 in the previous reading, rising for the fourth consecutive month and hitting a new high since October 2018. Consumer confidence rose for the fourth consecutive month due to improvements in all its elements, such as perceptions of households’ past and future financial situation, expectations of the country’s general economic situation, and the willingness to make significant purchases.

ECB Executive Committee member Schnabel told Reuters on Friday that the eurozone economy has come to an inflection point and that the recent rise in borrowing costs reflects improved fundamentals, downplaying concerns that rising yields could dampen economic growth. In the face of rising borrowing costs, the European Central Bank must decide on the future pace of its emergency bond purchases at its June 10 meeting, there are a growing number of policymakers calling for maintaining stimulus flows, fearing that if not, the economic recovery may stumble. Schnabel, who heads the ECB’s market operations, noted that “higher yields are a natural development at a turning point in the recovery, when investors become more optimistic and inflation expectations rise, and therefore nominal yields rise,” “which is exactly what we expect and what we want to see .”

The eurozone economy is emerging from a double-dip recession, with the broader service sector recovering from the epidemic blockade, the eurozone economy is expected to grow by more than 4% this year, although it may take another year to return to pre-crisis levels. Schnabel took a moderate view of the rise in nominal yields, saying it was expected and that financing conditions remained favorable, in line with the ECB’s commitment in December. She also noted that real or inflation-adjusted interest rates were generally stable.

Schnabel noted that the economic recovery still depends on continued policy support. Prematurely withdrawing from fiscal or monetary support would be a huge mistake. Schnabel said a large part of the economy is still in emergency mode. The problem now is that at the current rate, the ECB’s emergency debt purchase quota will run out before the program officially ends next March, so either the quota will be increased or the purchases will eventually be reduced. But Schnabel said that is a matter for later. Even after the emergency measures stop, inflation will still be below the ECB’s target of close to 2%, so other tools will be needed to stimulate the economy, including the ECB’s longer-used and less flexible asset purchase program, interest rates or liquidity operations.