BRUSSELS: The eurozone economy is healing nicely but inflation remains weak – good news for consumers in the short run but a sign of underlying weakness in wages and companies’ pricing power. That’s the take-away from economic reports released yesterday that showed while the unemployment rate in the 19-country currency union fell to its lowest in eight years, price increases are modest.
The number of people in work rose by 148,000 in June, the Eurostat statistics agency said yesterday, bringing the unemployment rate to 9.1 percent, from 9.2 percent in May. That echoes reports in recent weeks of rising business activity and confidence across all eurozone countries – even those, like Greece, that have been hit hardest by financial troubles.
Such improvements have emboldened the European Central Bank to consider when it might signal a phasing out of its bond-buying stimulus program, under which it pumps 60 billion euros ($70 billion) a month into the economy. ECB President Mario Draghi has said it would likely consider such a move in the fall.
But the missing piece in the eurozone’s recovery is a significant rise in inflation, which the ECB is tasked with getting to just under 2 percent. While weak inflation can be good for shoppers, it points to fragilities in the economy: wages are not rising quickly enough to spur spending or companies may not be confident enough in consumers to raise their prices.
In July, the annual inflation rate was stuck at 1.3 percent. And what gains there were mostly due to energy price increases of 2.2 percent. Excluding volatile items like energy, food, alcohol and tobacco, prices were up a still-modest 1.2 percent. The industrial goods sector saw prices rise a mere 0.5 percent.
The missing link
Economists say inflation is unlikely to rise substantially as long as there remains slack in the labor market that prevents wages from rising significantly. “While June’s unemployment data paint a positive picture of the eurozone labor market, July’s (inflation) release confirms that this strength has yet to generate inflationary pressure,” said Jennifer McKeown, chief European economist at Capital Economics in London. She expects the ECB to start tapering off its bond-buying program next year, but says “interest rate hikes are a pretty distant prospect.”
The inflation rate in particular was “very subdued”, said Jennifer McKeown of Capital Economics. “While June’s unemployment data paint a positive picture of the eurozone labour market, July’s (inflation) release confirms that this strength has yet to generate inflationary pressure,” McKeown said. The figures come a week after the IMF said the eurozone economic recovery was broad and strengthening, but warned that low inflation, fragile banks and Brexit remained significant risks.
The Eurostat statistics agency said unemployment fell to 9.1 percent in June compared to a revised 9.2 percent in May. That was slightly better than the 9.2 percent predicted by analysts surveyed for data company Factset. “This is the lowest rate recorded in the euro area since February 2009,” Eurostat said in a statement, when the European economy was still in the doldrums after the global financial crisis.
Persistent and patient
The highest unemployment rates were in struggling Greece, at 21.7 percent, and Spain at 17.1 percent. Unemployment across the 28-nation EU was meanwhile stable at 7.7 percent in June, the lowest rate for the bloc since December 2008. Eurozone inflation meanwhile held at 1.3 percent in July, matching estimates by Factset. Inflation is a key indicator of underlying consumer demand. The ECB has a target rate of close to, but just below 2.0 percent, with the aim of ensuring a modest but sustained increase in prices, which are a sign of a healthy economy.
To achieve this, the ECB has set interest rates at historic lows and poured hundreds of billions of cheap euros into the banking system to stimulate activity. Finally, after years of trying, the economy has shown signs of a modest but broad pick-up this year, leading to calls on ECB chief Mario Draghi to turn off the easy credit tap. Draghi last week played down suggestions the institution might soon wind down the stimulus, saying policymakers must be “persistent and patient” faced with low inflation.
Observers are eyeing the bank closely for signs it may soon end its monthly bond purchases of 60 billion euros ($69 billion) per month. Just three monetary policy meetings remain before December, when the “quantitative easing” (QE) purchases are presently set to expire. – Agencies