30/06/2003 15:25
Inflation in the dozen euro countries accelerated for the first time in four months in June, easing concern that deflation will push the economy into recession.
Consumer prices rose 2 percent in the year to June, up from 1.9 percent in May, the Luxembourg-based European statistics office said in an initial estimate. Adding to signs of an economic recovery, business and consumer confidence rose in June, European Commission surveys showed.
Falling prices in Germany, Europe's largest economy, stoked talk that the euro area might encounter Japan's experience with deflation -- a protracted drop in prices in an economy that isn't growing. European Central Bank President Wim Duisenberg said today he isn't concerned about deflation ``because there is none.''
``It's psychological -- if people see the inflation rate dropping month after month, they will give more credence to the deflation theory,'' said Miranda Xafa, an economist at the Eurozone Advisors consultancy who used to work for the International Monetary Fund. ``Now they see an uptick, deflation fears should recede.''
The Bundesbank and IMF have said there is a risk of deflation in Germany, where inflation slumped to a 3 1/2-year low of 0.7 percent in May. Policymakers want to prevent the economy mimicking Japan, where consumer prices have been sliding since 1998. In June, Germany's inflation rate rose to 1 percent.
Price Pressure
Deflation is typically defined as a sustained period of falling prices, and occurs as companies suffering from a sluggish economy keep cutting prices and consumers put off buying on expectations of lower prices to come.
The ECB earlier this month lowered its expectation for economic growth this year to 0.7 percent. Duisenberg said inflation will ``hover broadly around'' the ECB's 2 percent limit for the rest of this year.
``There is still pressure on prices,'' said Bruno Vanryb, chief executive of BVRP Software SA, a French maker of fax and modem software. ``I don't see any signs of increase of demand from clients.''
Inflation has been tamed by the 8 percent drop in oil prices and the 9 percent gain of the euro against the dollar this year, which makes imported goods cheaper. The gain of the euro, which currently buys $1.14, halted this month on expectations of faster economic growth in the U.S. stoking demand for U.S. assets.
BIS Outlook
``Inflation is expected to remain low in 2003,'' the Bank for International Settlements said in its annual report today. ``However, prospects for oil prices remain subject to uncertainties.'' Oil prices have fallen by about a fifth since increasing in the build-up to the war in Iraq.
Today's inflation estimate is based on energy prices in June, as well as inflation figures from Germany, Italy and Belgium. A more detailed breakdown will be available July 16. The reports from German states showed travel-related costs, such as package holidays, and fuel were the main drivers behind an increase in the country's inflation rate to 1 percent.
Confidence among consumers, whose spending accounts for more than half the 12-nation economy, rose to minus 19 in June from minus 20, a survey of 25,000 consumers by the commission showed. The index dropped to a nine-year low of minus 21 in March.
Business confidence rose to minus 12 from minus 13 in May, the lowest since February 2002, a survey of the same number of companies showed. Business investment is likely to fall 1 percent this year, a separate survey done in April showed.
The contraction of European manufacturing and services may have slowed in June, surveys by NTC Research for Reuters Group Plc will show this week, economists predicted. The report on manufacturing will be released tomorrow.
`Bumbling Along'
``The economy may be at the bottom of the cycle, where it's likely to be bumbling along for some time,'' said Simon Rubinsohn, chief economist at Gerrard Ltd. in London, which manages the equivalent of $27 billion.
Fiat SpA, Italy's biggest manufacturer, said last week it will cut 12,300 jobs worldwide to reverse losses. Fiat already trimmed 6 percent of its workforce last year. Joblessness in the euro area remained at a 39-month high in April.
``I'm unemployed and making ends meet with the help of my family, and some money made by teaching private lessons,'' said Nikos Michotas, a teacher, while shopping in an Athens supermarket. ``I'm not confident of finding a full-time job soon.''
ECB policymakers from Ernst Welteke to Duisenberg say there is no need to lower borrowing costs to spur growth. The ECB has trimmed borrowing costs three times since December, to 2 percent, the lowest since at least 1948 in any of the euro countries.
Investors have pared their expectations for another rate reduction by the ECB, futures trading shows. The yield on the December Euribor contract was at 1.93 percent at 1:52 p.m. in Brussels, compared with a three-month money market rate of 2.18 percent. On June 13, the yield on the Euribor contract fell to 1.76 percent on expectations the ECB would cut rates again.
Concerned about deflation, the U.S. Federal Reserve, which has lowered rates 13 times in the past two years, trimmed its benchmark overnight lending rate to 1 percent last week.
Consumer prices rose 2 percent in the year to June, up from 1.9 percent in May, the Luxembourg-based European statistics office said in an initial estimate. Adding to signs of an economic recovery, business and consumer confidence rose in June, European Commission surveys showed.
Falling prices in Germany, Europe's largest economy, stoked talk that the euro area might encounter Japan's experience with deflation -- a protracted drop in prices in an economy that isn't growing. European Central Bank President Wim Duisenberg said today he isn't concerned about deflation ``because there is none.''
``It's psychological -- if people see the inflation rate dropping month after month, they will give more credence to the deflation theory,'' said Miranda Xafa, an economist at the Eurozone Advisors consultancy who used to work for the International Monetary Fund. ``Now they see an uptick, deflation fears should recede.''
The Bundesbank and IMF have said there is a risk of deflation in Germany, where inflation slumped to a 3 1/2-year low of 0.7 percent in May. Policymakers want to prevent the economy mimicking Japan, where consumer prices have been sliding since 1998. In June, Germany's inflation rate rose to 1 percent.
Price Pressure
Deflation is typically defined as a sustained period of falling prices, and occurs as companies suffering from a sluggish economy keep cutting prices and consumers put off buying on expectations of lower prices to come.
The ECB earlier this month lowered its expectation for economic growth this year to 0.7 percent. Duisenberg said inflation will ``hover broadly around'' the ECB's 2 percent limit for the rest of this year.
``There is still pressure on prices,'' said Bruno Vanryb, chief executive of BVRP Software SA, a French maker of fax and modem software. ``I don't see any signs of increase of demand from clients.''
Inflation has been tamed by the 8 percent drop in oil prices and the 9 percent gain of the euro against the dollar this year, which makes imported goods cheaper. The gain of the euro, which currently buys $1.14, halted this month on expectations of faster economic growth in the U.S. stoking demand for U.S. assets.
BIS Outlook
``Inflation is expected to remain low in 2003,'' the Bank for International Settlements said in its annual report today. ``However, prospects for oil prices remain subject to uncertainties.'' Oil prices have fallen by about a fifth since increasing in the build-up to the war in Iraq.
Today's inflation estimate is based on energy prices in June, as well as inflation figures from Germany, Italy and Belgium. A more detailed breakdown will be available July 16. The reports from German states showed travel-related costs, such as package holidays, and fuel were the main drivers behind an increase in the country's inflation rate to 1 percent.
Confidence among consumers, whose spending accounts for more than half the 12-nation economy, rose to minus 19 in June from minus 20, a survey of 25,000 consumers by the commission showed. The index dropped to a nine-year low of minus 21 in March.
Business confidence rose to minus 12 from minus 13 in May, the lowest since February 2002, a survey of the same number of companies showed. Business investment is likely to fall 1 percent this year, a separate survey done in April showed.
The contraction of European manufacturing and services may have slowed in June, surveys by NTC Research for Reuters Group Plc will show this week, economists predicted. The report on manufacturing will be released tomorrow.
`Bumbling Along'
``The economy may be at the bottom of the cycle, where it's likely to be bumbling along for some time,'' said Simon Rubinsohn, chief economist at Gerrard Ltd. in London, which manages the equivalent of $27 billion.
Fiat SpA, Italy's biggest manufacturer, said last week it will cut 12,300 jobs worldwide to reverse losses. Fiat already trimmed 6 percent of its workforce last year. Joblessness in the euro area remained at a 39-month high in April.
``I'm unemployed and making ends meet with the help of my family, and some money made by teaching private lessons,'' said Nikos Michotas, a teacher, while shopping in an Athens supermarket. ``I'm not confident of finding a full-time job soon.''
ECB policymakers from Ernst Welteke to Duisenberg say there is no need to lower borrowing costs to spur growth. The ECB has trimmed borrowing costs three times since December, to 2 percent, the lowest since at least 1948 in any of the euro countries.
Investors have pared their expectations for another rate reduction by the ECB, futures trading shows. The yield on the December Euribor contract was at 1.93 percent at 1:52 p.m. in Brussels, compared with a three-month money market rate of 2.18 percent. On June 13, the yield on the Euribor contract fell to 1.76 percent on expectations the ECB would cut rates again.
Concerned about deflation, the U.S. Federal Reserve, which has lowered rates 13 times in the past two years, trimmed its benchmark overnight lending rate to 1 percent last week.
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