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EMU CommentHigher growth and inflation; lower unemployment

  1. Growth in 2016 was higher than expected
  2. Inflation spiked and unemployment fell
  3. Inflation close to the ECB's target
2016 growth was higher than expected
Real GDP growth increased to 0.5 percent q-o-q in Q3 2016, as expected, up from 0.3 percent in Q3. Annual growth was a bit higher than expected, at 1.8 percent, due to upward revisions to earlier quarters. That implied growth was at a robust 1.7 percent in 2016, although still fall from 2.0 percent in 2015. The numbers did not come with sub-components, but we expect the increase to be largely driven by domestic demand (private consumption and fixed investment).
Inflation spiked and unemployment fell
Annual headline HICP inflation jumped (again) by more than expected to 1.8 percent in January, from 1.1 percent previously, as expected. Hence, inflation reached its highest level since mid-2013, helped by a significant positive base effect stemming from lower energy prices a year ago. This effect should only support inflation marginally in February before reversing its course thereafter. As expected, the surge in inflation was mainly due to increased goods inflation (see graph); core HICP inflation stayed at 0.9 percent and service inflation actually decreased a notch, to 1.2 percent. By country, headline inflation skyrocketed in France (to 1.4 percent), Spain (to 3 percent) and Belgium (to 2.7 percent), whereas German inflation rose by less than expected (to 1.9 percent). Hence, Germany could win some support in the increased worries about overheating. Underlying inflation is still low: in France, it actually fell to almost a record low of 0.4 percent in January. We see scope for increasing core inflation in the coming months, as the surge in headline inflation will likely have some spillover effects outside of energy and the fall in unemployment has continued to support higher wage growth in some segments. In December, the unemployment rate unexpectedly decreased to 9.6 percent, from a downward-revised 9.7 percent in November (see graph). Additionally, the decline in German unemployment unexpectedly accelerated in January; the rate reached a new record low of 5.9 percent, which likely supports the overheating worries in Germany further.
Headline inflation close to the ECB target
The GDP data bodes well for growth in the beginning of 2017. Recent sentiment survey stability adds support to the notion that growth momentum was unchanged and remained robust in January, but not building further. Additionally, today's inflation numbers can be said to be very close to the ECB's target of 'close but below 2 percent'. The data supports the idea that the ECB might have to consider a less accommodative policy ahead; we cannot rule out the ECB somehow acknowledging that at the next policy meeting. But we still did not get signs of underlying inflation being influenced and the ECB would like to see that before considering a less accommodative stance. For now, we maintain the view that higher headline inflation only will spillover to underlying inflation to a small extent and will increasingly be a drag on the consumer-driven expansion this year.



Rasmus Gudum-Sessingø

Senior Economist


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