Euro zone revival carries sting in tail

LONDON: The euro zone's belated economic revival could carry a sting in the tail. Signs of a pickup in business activity and slightly rising prices are welcome for the single currency area. The risk is that a sustained pickup exposes the bloc's multi-speed recovery.

Europe's low-key upturn has been overshadowed by political turmoil in Italy and investors' excitement about a possible economic boom in the United States under President-elect Donald Trump. Nevertheless, the European Central Bank's ultra-loose monetary policy and the weak euro appear to be having an impact.

A Markit survey of purchasing managers published on Jan. 4 showed output in the currency bloc in December expanding at its fastest pace since May 2011. In the same month, euro zone inflation crept above 1 percent for the first time in more than three years.

The ECB's battle against deflation is far from won. The recent pickup owes much to the recovery in oil prices in the past year. Excluding energy costs, inflation in December was the same as a year ago. It's also still well below the ECB's 2 percent ceiling.

The central bank itself forecasts prices will rise by just 1.7 percent in 2019. Investors are even more sanguine: market indicators show that expectations for long-term inflation five years out are still well below 2 percent.

This subdued outlook suggests the ECB and euro zone governments should be worrying about sustaining the recovery, not choking it off. However, the revival is uneven.

In Germany, headline inflation hit 1.7 percent in December - fuelling renewed demands by hawkish economists and politicians for the ECB to wind down its stimulus.

The central bank is committed to keep buying bonds until December, giving it scope to react to any political turmoil that could arise from elections in France and Germany - or further afield.

But if the uneven recovery is still on track at the end of the year, the ECB will have to decide whether it prefers a policy that might be too loose for Germany, or too tight for the euro zone's periphery. Subdued long-term government bond yields imply it will favour the former.