The Eurozone Gross Domestic Product figures for Q4 2013 have just been published. Year over Year growth has come in at 0.5% compared to a consensus estimate of 0.5% and a previous figure of 0.5%. At the same time the Quarter over Quarter number has been announced as 0.3% versus a consensus of 0.3% and a previous of 0.1%
Additionally, this mornings announcement contained data on Eurozone Retail Sales for January, the important Year over Year number is surprisingly higher at 1.3%, against an expectation of -0.4%.
Currency markets tend to be particularly sensitive to GDP figures, this week however the European data is being overshadowed by tomorrow’s key European Central Bank (ECB) meeting.
The ECB meets to consider Eurozone monetary policy. There had previously been an expectation of a further easing of the historically low official rate, this has dissipated somewhat as a concerning downward trend in the inflation rate appears to have come to a halt.
Inflation is dangerously low in the Eurozone, a deflationary cycle can cause serious long term damage to an economy. Whereas growth is typically cyclical and on average alternates between 5 year periods of strength and weakness, deflation can cripple an economy for a decade or more. Japan is a prime example of this, the authorities there are still struggling to stimulate an economy that entered a deflationary cycle back in the 1990’s.
The ECB will be acutely aware of this situation. The Governing Council is typically a conservative group, with 28 nations to please, it has to be. The question driving the Euro this morning is will the ECB be able to retain their nerve in the face of the serious deflationary threat.
The Euro has been on edge this morning, despite a stable GDP figure and a Retail Sales figure that contained a positive surprise element, the Euro is experiencing a selloff. The natural conclusion to be drawn is that the market is concerned that the ECB will use economic robustness as an excuse to avoid or postpone the monetary loosening necessary to stave off deflation.
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