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Europe Ahead: European inflation and unemployment will probably continue rising
Fri, Jan 29 2010, 08:55 GMT
by ecPulse.com analysis team
As a consequence to the improvement witnessed since the third quarter, when the euro area left the recession by growing 0.4% from the previous contraction of 0.2%; theinflation rate shifted to positive areas in November, creeping up towards the bank’s 2% target.
Prices accelerated to 0.9% in December and are expected to continue its rally to 1.2% in January. According to the monthly bulletin for January; ECB members mentioned that “The current rates remain appropriate”, since “inflation is expected to remain moderate over the policy-relevant horizon.”
The euro zone will probably grow in the fourth quarter after impressive data released in the last three months in 2009. PMI manufacturing for December’s final reading rose to 51.6 from 51.2 in November; while PMI services climbed to 53.6 from 53.0 in November.
The economy showed remarkable advancement after the monetary measures adopted by the ECB to stop the economic deterioration. Trichet and his economic team lowered the cost of borrowing to 1%, and introduced 60 billion euros on purchasing bonds to revive growth. In addition, national European governments increased spending which gave another impetus to prices.
These measures boosted prices and removed deflationary pressures that were threatening the economy at the beginning of the crisis. However, there are some factors that may cause prices to ease in the coming period.
The rising unemployment, which jumped from 8.5% in January 2009 to 10.00%, the highest in more than 11 years, in December is perhaps the most challenging for the ECB. Jobless rate is predicted to incline to 10.1% in January, according to analyst forecasts.
Many European companies cut jobs to slash expenses to return to profitability. For instance, Siemens AG announced previously that it has slashed the number of workers from all its affiliates to 408,000 this year from roughlyabout420,000.
At 19.4%, Spain has the highest jobless rate in November across the 16 countries using the unified currency. Spain, which was once described as the catalyst of the euro area’s growth, was severely impacted by the recession that caused housing sector, which was responsible for the boom andshed of many employees.
However, the euro’s depreciation seen in December and January may help prices to edge up. The 16-nation currency dropped to more than five-month low against the dollar in January, after concerns regarding the swelling budget deficit in some European economies, more specifically Greece.
Moreover, analysts are expecting moderate recovery in the first half of the current year and volatility in the second half, after the ECB unwinds its stimulus measures. PMI manufacturing for January advanced reading inclined to 52.0 from 51.6 below estimates, while PMI services slipped to 52.3 from 53.6.
There might be sluggish recovery this year, since the ECB will probably hike interest rate and remove emergency measures in the second half of the year. Also, budget deficit problems in many European economies are raising concerns and are expected to cause recovery to slowdown as governments will be forced to cut spending to rein in budget deficit.
According to Fitch ratings announced on January 26; European governments may need to borrow 2.2 trillion euros from capital markets this year, in order to finance their deficits.
Greece was downgraded by S&P and Fitch and may be subject to further cuts if it could not adjust its deficit. The problem also is occurring in other economies such as Spain and Portugal; thus, the ECB has to take into consideration that recovery is still weak when exiting stimulus.