It's spring time

By P.W. | FLORENCE

TODAY’S batch of business surveys paint a reassuring picture of the euro-zone recovery. Though better than nothing this was pretty sluggish last year, starting with growth of just 0.3% in the second quarter, which slipped to 0.1% in the third and 0.2% in the fourth; annualised, these rates were 1.3%, 0.6% and 0.9%. But the upturn seems to have gained momentum in early 2014, with Germany in particular having made a strong start to the year.

Today’s reports from Markit, a research outfit, suggest that growth may pick up even more in the second quarter, with output off to a brisk start in April. An index covering both manufacturing output and business activity in the services sector rose from 53.1 in March to 54 in April, the highest since May 2011. The jump was unexpected: the markets had anticipated a similar performance to that of March. A level above 50 indicates expansion; one below 50 indicates contraction.

The upturn in activity was led by Germany, whose own composite output index of services and manufacturing jumped from 54.3 in March to 56.3, the second-highest in nearly three years. Both services and manufacturing shared in the upswing and the outlook appears promising with business optimism high as consumer confidence picks up and foreign demand rises. By contrast, France seems to be stuck in a rut, with its overall index of output in services and manufacturing slipping back from 51.8 in March to 50.5, in effect stagnation.

Despite French woes, the overall picture for the 18-strong currency club is encouraging. Already analysts are rethinking their growth forecasts. For example Greg Fuzesi, an economist at J.P. Morgan, is now expecting growth in the second quarter to reach an annualised rate of 1.75% rather than 1%; and for the euro-zone economy then to expand at an annualised rate of 2% a quarter until the end of 2015, a much healthier performance than last year's feeble recovery.

This matters for whether or not the European Central Bank will take more drastic action to counter the risk of deflation in the euro zone. Following this month’s meeting of the ECB’s governing council, when Mario Draghi, the bank’s president, revealed that the council had discussed quantitative easing, there has been a flurry of speculation about whether the ECB might carry out QE, buying financial assets with central-bank money. Many bond investors are behaving as if this were a done deal, causing sovereign yields in southern Europe that once had governments on the rack to subside to an extraordinary extent.

But there is a big difference between debate and action, the more so for a central bank that has been keener in recent months on influencing markets through words and threats rather than deeds. Unless inflation stays very weak—it fell to just 0.5% in March—and this in turn starts to shift longer-term expectations away from the ECB's target of "below but close to" 2%, the central bank would much prefer to stick to its plan A. Under this scenario, the recovery gathers momentum and starts to eat into spare capacity, which in turn weakens disinflationary forces and removes the threat of deflation.

The stronger the recovery becomes, the less likely the ECB is to turn to plan B, deploying unconventional weapons such as QE. And even if it does find it necessary to switch course, QE is likely to be the last resort, with the first steps consisting of a further small cut in its main lending rate; and more radically, the introduction of negative interest rates on deposits held by banks with the central bank.