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Europe Deflation Scare Over?

Europe Deflation Scare Over?Europe Deflation Scare Over?

The euro area’s brush with deflation might be over before it even started. After falling for four straight months, consumer prices in the currency bloc were unchanged in April, according to economists polled by Bloomberg.

The respite, coming just as the region’s recovery improves, signals that the effect of a slump in oil prices is petering out without triggering a reinforcing decline in prices and wages.

The European Central Bank, which started buying government bonds in March to counter the threat of deflation, may find more evidence in coming days that the 19-nation economy is on the mend. Falling euro-area unemployment and encouraging data from Germany to Spain will support policy makers’ projection of a gradually strengthening recovery whose biggest risk is an imminent exit of Greece from monetary union.

 “Further signs of improvement in inflation data should help ease fears of a dangerous deflationary spiral,” said Johannes Gareis, an economist at Natixis in Frankfurt. “The ECB will probably hail the better inflation development. But for eurozone consumers, the deflation scare didn’t even start.”

Depressed by oil prices falling almost 50 percent in the second half of 2014, the inflation rate turned negative in December and fell to minus 0.6 percent at the beginning of the year, matching an historical low. The decline has eased since then and probably came to a halt in April, according to the median of 40 estimates in a Bloomberg survey. Eurostat will publish the report at 11 a.m. on Thursday in Luxembourg.

  Confirmed Recovery

The rebound coincides with the roll-out of the ECB’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing program. Its full implementation will bring inflation back toward the central bank’s goal of just below 2 percent by 2017 and foster the fastest growth since 2007, according to the ECB’s own forecasts.

“The impact of QE is being felt just as the recovery is being confirmed, and it will reinforce it,” ECB Executive Board member Benoit Coeure said in an interview with the magazine Alternatives Economiques published on Tuesday. “It’s a mechanism that is potentially powerful.”

While ECB President Mario Draghi has been sounding more upbeat about the euro-area economic comeback since the start of QE, he has also warned that it won’t be sustainable without structural reforms. He has said the current recovery is only “cyclical” so far and won’t become “structural” unless governments deliver change that increase the region’s long-term growth prospects.

  Stubborn Unemployment

Looming large in policy makers’ minds is still-stubbornly high unemployment across the region. The rate probably edged down to 11.2 percent in March from 11.3 percent in February, economists predicted before a report due on Thursday, continuing a very gradual downward trend that started almost two years ago. It still remains well above the pre-crisis low of 7.2 percent.

In Germany, where data on Wednesday are forecast to show that inflation accelerated to 0.2 percent from 0.1 percent in March, consumers have been driving what the Bundesbank describes as “quite robust” growth.

Retail sales rose 0.5 percent last month, according to economists, which would mark the fifth increase in the past six months. Europe’s largest economy probably also saw a further decline in unemployment after it fell to the lowest level since reunification in March, according to a separate survey.

In Spain, where a slump in consumer prices is also easing, economic growth probably accelerated in the first quarter to the strongest in more than seven years. Economists predict gross domestic product increased by 0.8 percent in the first three months of the year. The data will be released on Thursday.

 

Financialtribune.com