Eurozone Economy Speeds Up, Raising Chance of Stimulus Taper

Eurozone economic growth gathered pace in the three months to June, making it more likely the European Central Bank will decide in 2017 to remove some of its growth-boosting stimulus measures.

The currency area’s economy has now recorded three straight quarters of strong growth, the longest such period since its rebound from the recession that followed the global financial crisis, and before it entered its own government debt and bank solvency turmoil.

Its economic strength has been a boon for the global economy this year, partly offsetting weaker-than-expected U.S. growth. Entering 2017, most economists expected eurozone growth to slow in response to heightened uncertainty amid a busy year for political elections and higher energy costs.

However, the European Union’s statistics agency said Tuesday that eurozone gross domestic product was 0.6% higher in June than in the three months through March, and 2.1% higher than in the second quarter of 2016.

That marked a pickup from the 0.5% quarterly growth rate recorded in the three months to March and was the fastest annual growth rate since the first quarter of 2011.

The quarterly measure in the three months to June was equivalent to an annualized growth rate of 2.3%, making it weaker than the 2.6% expansion recorded by the U.S., but stronger than the 1.2% growth posted by the U.K.

“All in all, the eurozone economy has rounded out the first half of the year in a very healthy state and seems to be set up nicely for continued firm growth for the rest of 2017,” said Bert Colijn, an economist at ING Bank.

Eurostat gave no details on which parts of the economy had contributed most to the acceleration, although economists suspect both consumer spending and business investment played their part.

There is also little information on how the eurozone’s members performed. Spain has separately recorded an acceleration in the second quarter, while France says its growth rate was unchanged. Germany and Italy—the largest and third largest members respectively—have yet to report.

The ECB has already raised its growth forecast twice this year and may do so again in September. It currently expects the eurozone economy to grow by 1.9% across 2017.

In July, Mario Draghi, the central bank’s president, described the recovery as “robust” and said policy makers would decide during the fall on the future of their bond-buying program, which is tentatively scheduled to end in December. ECB watchers expect the stimulus program, known as quantitative easing, to be extended into 2018, but at a reduced scale. Most doubt the purchases will continue into 2019.

The recovery has helped drive the eurozone’s jobless rate to its lowest level in almost eight years, while business and consumer confidence is at highs not seen since before the global financial crisis.

However, for the ECB, one key ingredient remains absent: a sustained rise in inflation toward its target of just below 2%. Figures released Monday showed consumer prices were up just 1.3% in July from a year earlier, a rate of inflation that was unchanged from June and the lowest in 2017.

Nonetheless, the pickup in growth has contributed to a change in mood within the eurozone’s institutions, which has also been boosted by political victories.

As the start of 2017, nationalist political parties that were hostile to the euro and conventional economic policies appeared to have the momentum, buoyed in part by the U.K.’s Brexit vote and Donald Trump’s election as U.S. president.

Instead, centrists who favor the euro have been victorious in Dutch and French elections and opinion polls suggest German Chancellor Angela Merkel will remain in office after a September vote.

However, the International Monetary Fund warned eurozone leaders in July against becoming complacent and highlighted a number of deep-seated problems that continue to threaten cohesion.

And while the fund last month raised its growth forecast for the currency area and lowered its projection for the U.S., it still expects the latter to grow faster in 2017.

There are early signs the second half of the year won’t be quite as strong as the first for the eurozone. A survey of 3,000 manufacturing companies released Tuesday found that activity increased at a slower pace in the four months during July than previously indicated. But at 56.6, the Purchasing Managers Index for the sector still pointed to strong growth and even perennial laggard Greece recorded a second straight month of increased output for the first time in three years.

Expectations that stronger growth will prompt the ECB to reduce its bond buys may themselves be a problem for the recovery in the rest of 2017, since they have led to a strengthening of the euro that could hit exports and damp inflation.

“The strength of the euro is likely to be an important consideration for the ECB,” said Apolline Menut, an economist at Barclays bank.