Azad Zangana, European Economist for Schroders, looks at the progress being made in the Eurozone ahead of this weeks' European PMIs announcement and the ECB and UK MPC meetings.

"In order to unlock higher growth, the European Central Bank (ECB) must build on the improvements seen in credit conditions and the demand for credit. Higher growth is essential to reduce the eurozone’s vulnerability to any future macro or political shocks.

"The recovery in the eurozone remains slow but the monetary union is making progress in emerging from the sovereign debt crisis. Institutional change has followed to improve the resilience of the banking sector, while safety nets were introduced in order to protect sovereigns. Although the economy is improving, it remains vulnerable to shocks, especially as growth has not accelerated to more healthy levels.

Euro Sculpture by Lars Aronsson

Euro Sculpture by Lars Aronsson

Recent weaker data

"Over the past few months, investors' fears about the eurozone's recovery have been re-emerging as a number of leading business surveys have been falling and the most recent industrial production data have been weaker than expected. At this stage, the softer data are not yet a concern, as prior to these falls the indicators had been very strong. More recently, the advanced numbers for the July Purchasing Managers’ Index (PMI) showed a bounce back, which if confirmed when the full release is published, should help dispel fears of a slip back towards recession.

Credit channel is key

"As we have discussed in the past, the reason for our forecast of a subdued recovery is the ongoing reform and repair of the banking system, particularly as the change in rules and additional scrutiny may have prompted banks to reduce the size of their loan books. This process should now be reaching an end, and along with the additional liquidity from the ECB in the form of the targeted long-term refinancing operations (LTROs), we should see some improvement in lending and economic activity towards the end of the year and into 2015.

"Meanwhile, the ECB's credit conditions survey shows that credit conditions are loosening across the board, while demand for credit is picking up sharply. More lending is the key to unlocking stronger growth and reducing the vulnerability of the eurozone economy. The ECB must ensure that it continues to aid the early improvements in credit conditions, while at the same time building its own credibility as a banking regulator. "

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