Easing inflation, wages aid case for euro zone stimulus

Annual euro zone inflation down 1.8 per cent, lowest since mid 2010

BRUSSELS (Reuters) — Inflation pressures in the euro zone are easing, data showed on March 15, giving governments and central bankers a touch more leeway for stimulus as the region's leaders seek to shift their focus to reviving economic growth.

Modest wage growth and a cooling of food price pressures drove annual euro zone inflation down to 1.8 per cent in February, its lowest level since mid-2010, the EU's statistics office said on March 15.

The figure, which confirmed Eurostat's flash estimate from March 1 and was as expected by economists polled by Reuters, is around the European Central Bank's target of below but close to two per cent.

Combined with only very modest wage increases in the fourth quarter of 2012, the data highlights the weakness of the euro zone economy and will fuel expectations in some quarters that the ECB could cut interest rates this year.

"With inflation set to undershoot the ECB's objective, an interest rate cut appears to be largely constrained by the prospect of an economic recovery in the second half of this year," Citigroup said in a research note.

But with commercial bank lending in the euro zone still subdued despite base rates being at a record low of 0.75 per cent, others are sceptical about the impact of another cut.

Three quarters of economists expect the ECB to leave rates unchanged for the rest of the year, according to a Reuters poll published on March 13.

Already in recession in 2012, the euro zone economy is expected to shrink 0.3 per cent this year as households and businesses struggle with the fallout of the bloc's public debt crisis and government spending cuts.

Thousands of protesters called on EU leaders, whose two-day summit in Brussels is due to end on March 15, to put an end to the austerity blamed for record unemployment in parts of Europe.

"Market pressure on European governments has been replaced by people pressure as a result of austerity and reform fatigue," said Barclays economist Philippe Gudin.

Growth and austerity

The ECB's role is important because EU leaders are trying to find ways of reviving economic growth while budget discipline remains part of their strategy to overcome the bloc's debt crisis.

"There are no easy answers," European Council President Herman Van Rompuy, who chairs the summit, told a news conference onMarch 14. "The good progress towards structurally balanced budgets must continue," he said.

France and Italy did win support for a slightly more growth-friendly interpretation of European Union budget rules at the summit after French President Francois Hollande challenged German-driven fiscal austerity.

One silver lining in the Mediterranean region is that only very modest wage increases are helping to improve competitiveness after a decade-long boom fuelled by easy credit pushed the euro zone into a false sense of economic well-being.

Hourly labour costs in the euro zone rose 1.3 per cent overall in the last three months of 2012, compared to the same period in 2011. Wages per hour grew by 1.4 per cent.

Those rises were less than half the level of increases in early 2009, at a time when Europeans were giving themselves generous pay hikes, pushing up the cost of labour by 12 per cent between 2001 and 2011.

In Spain, hourly labour costs fell 3.4 per cent, but Germany recorded a 2.9 per cent increase, which bodes well because wealthier consumers in Europe's largest economy could buy more of their neighbours' products.

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