Economists express cautious optimism over eurozone growth

Economists expressed cautious optimism on Wednesday over news of improved euro area economic data which might indicate that the eurozone could be heading for a moderate growth in the second half of 2013. The euro area flash composite PMI moved back above 50 in July, increasing 1.7 points on the month to 50.4 versus an expected 0.4 point gain, driven by manufacturing and services indices increasing by 1.3 points to 50.1 and 1.4 points to 49.6 respectively. This was the first time in 18 months that both manufacturing and services have moved upwards. Marco Stringa with Deutsche Bank, told Xinhua, "You could say that external demand is driving recovery, but services are up too. Given the ongoing deleveraging of peripheral countries you would expect a key factor for the euro area to improve with external demand coming from the United States." "There are a number of risks that could jeopardize the recovery but even if the base level recovery is only half of what we have seen over the past few months we are still going towards a positive second half," he added. He said that the European Central Bank (ECB) could be able to step back and let the recovery run, adding that monetary policy may not be too proactive and that it might remain with a commitment to keeping rates at this level or lower for a certain amount of time. In terms of fiscal policy, Stringa it gave a bit of "breathing space" to countries like France and it may help governments in Portugal, Spain, and Italy which are facing domestic political problems. "Returning to growth is really important. It would also decrease the risk of rising social tensions in the euro area," Stringa added, warning that it was only one month's figures, and that one should not get carried away with them. Dr Howard Archer, chief European and UK economist with IHS Global Insights, said, "The hope for the eurozone is that current gradually rising confidence encourages businesses to increasingly pare back their job cutting and become more prepared to invest, and also encourages consumers to spend a little more." Archer said that consumers' purchasing power is being helped by muted consumer price inflation, at 1.6 percent across the eurozone in June. Archer said it was "more likely than not" that the ECB would keep interest rates unchanged at 0.5 percent next week at its August 1 policy meeting. He added, "We think it is very possible that the ECB will eventually take its key policy rate down from 0.50 percent to 0.25 percent as we anticipate that the eurozone will continue to find it very tough to develop clear growth despite the improved July surveys." "An eventual cutting of interest rates by the ECB would also likely ram home the message that any tightening of monetary policy is a long way off and could help to keep bond yields down," He said.