European Economic Highlights
Labor Market Economist
17 Jun. 2014
By Martina Fazio and Bert Colijn
The prospects for the Euro Area economy remain rather bleak, with disappointing first quarter output growth and persisting low inflation. After May’s inflation rate dropped to 0.5 percent, the European Central Bank (ECB) finally adopted some radical measures to stave off the risk of a deflationary spiral leading to prolonged stagnation. These involve both the cutting of the main refinancing rate from 0.25 to 0.15 percent and the setting of a negative deposit rate of -0.1 percent. This is hoped to encourage banks to lend more, to peripheral economies in particular, and to help weakening the euro, which has been appreciating since 2012, when the president of the ECB Mario Draghi committed to do “whatever it takes” to save the currency. Both of these will then in turn help increase the inflation rate in the Euro Area. Furthermore, the intervention package also includes a Targeted Longer-Term Refinancing Operations (TLTROs) provision, which gives banks the possibility to access cheap credit to allocate to SMEs in the amount of up to 400 billion.
Even though it is uncertain whether the business sector will ultimately experience any benefit from the European Central Bank intervention, data released last week shows that industrial production in the Euro Area appears to be moderately improving. In spite of the volatility, the indicator has been on an upward trend throughout last year, and registered a further increase this April, even though the pace of growth remains slow. The positive momentum is also confirmed by the Purchasing Managers Index for manufacturing, which moderated in May but continued to signal expansion for all Euro Area countries except France.
Also contributing to the slow pace of recovery is the condition of the labor market. Employment growth remained modest in the Euro Area at 0.1% in the first quarter of this year, with some variations across countries. Some of the most troubled economies like Italy, Cyprus and Portugal are still seeing employment declines, while France didn’t register any employment growth throughout the last three quarters. Across industries, the construction sector is experiencing the most difficulties in recovering from the crisis, undergoing an employment reduction of one percent in the first quarter.
This week, we will see the release of detailed inflation numbers for the Euro Area countries. Even though the disinflationary tendency is widespread across Europe, vast differences across countries persist, with countries like Germany and Austria showing rates of price growth above 1 percent, while Greece, Cyprus and Portugal are still battling against deflation. Some confidence indicators for the currency area will also be released, with the ZEW survey Economic Sentiment indicator for June coming out on Tuesday and the European Commission Consumer confidence index out on Friday. The trend for this index has been very positive in the past few months, but consumer spending seems to be lagging behind and it may require even more time before this translates into higher retail sales, given the labor market outlook and the constrained situation many households are still in.