Global News
FRANKFURT—The euro zone slid closer to recession as Spain’s economy stalled and unemployment across the 17-member bloc surged unexpectedly to its highest level since the creation of the euro, complicating the European Central Bank’s efforts to navigate the region through its debt crisis.
Inflation remained entrenched at three-year highs well above the ECB’s 2% target, limiting the scope for incoming President Mario Draghi to stimulate growth through interest-rate cuts when the bank’s governing council meets later in the week.
Euro-zone unemployment jumped by 188,000 in September, pushing the jobless rate up 0.1 percentage point to 10.2%, according to a report from European Union statistics agency Eurostat. Unemployment is now at its highest level, 16.2 million, since records for the euro area began in January 1998.
“There are real risks that the region now falls back into recession,” says Ben May, economist at consultancy Capital Economics. He expects euro-zone gross domestic product will decline 0.5% in 2012 from 2011.
The Paris-based Organization for Economic Cooperation and Development, a policy group that includes the world’s major economies, slashed its euro-zone GDP growth forecasts for next year to 0.3% from 2% just five months ago. The euro zone will significantly lag behind other major economies, including the U.S. and Japan, according to the OECD’s revised forecasts Monday.
“A marked slowdown with patches of mild negative growth is likely” in the euro zone, the OECD said.
Recession is commonly defined as back-to-back quarters of contraction. The euro zone likely expanded at a moderate pace last quarter, thanks in large part to strong growth in Germany, says Greg Fuzesi, economist at J.P. Morgan Chase. But it will likely fall at a 0.5% rate in the current quarter, he said, citing the unemployment figures and recent grim surveys of purchasing managers.
Even more worrisome, Mr. Fuzesi says, is the increasing divergence among the bloc’s members. Unemployment in Germany, Austria and the Netherlands—which have enjoyed solid recoveries with falling budget deficits—is under 6%. But it is climbing to crisis levels in Europe’s struggling periphery. Irish unemployment is above 14%, while Greece’s rate is approaching 18%, putting added pressure on state spending on unemployment and social services. “The country detail is almost worse than the headline,” Mr. Fuzesi says.
Spanish unemployment jumped to 22.6% in September, the highest in the euro zone. The Bank of Spain said economic activity was flat in the euro zone’s fourth-biggest economy last quarter. With activity flatlining, Madrid may miss its deficit-reduction targets, which could force the government into another round of growth-draining austerity.
The usual response by central banks to rising unemployment and recession risk is a reduction in short-term interest rates. The ECB is one of the only major central banks with room to cut rates, having raised them in April and then July to 1.5%. Those decisions were roundly criticized, especially outside Europe, for adding to the bloc’s headwinds while the debt crisis intensified.
The Federal Reserve, Bank of England and Bank of Japan have interest rates closer to zero.
Mr. Draghi, who succeeds Jean-Claude Trichet as ECB president on Tuesday, is unlikely to respond with an interest-rate cut at Thursday’s ECB meeting, the first of his presidency. Euro-zone inflation remained at a three-year high of 3% in October, Eurostat said Monday.
Keeping inflation under 2% is the ECB’s sole mandate, a philosophical legacy of Germany’s conservative central bank, the Bundesbank. Mr. Draghi had to overcome early doubts that an Italian would take a sufficiently hard line against rising prices, given Italy’s history of high inflation and debt levels. Cutting rates so soon, with inflation still quite high, would risk damaging Mr. Draghi’s credibility early on, some analysts say.
“Inflation is clearly at an uncomfortable level for the ECB. With Draghi wanting to look more German than the Germans, that will be a consideration Thursday,” says Gustavo Bagattini, economist at RBC Capital Markets. Like many other economists, Mr. Bagattini expects evidence in the case for a rate cut to mount by the time of the ECB’s December meeting, when officials will unveil freshly minted forecasts for growth and inflation into 2013. He expects a half-percentage-point rate reduction at that meeting, the second under Mr. Draghi’s leadership—fully reversing Mr. Trichet’s April and July increases.
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By: Brian Blackstone
Source: The Wall Street Journal, November 1, 2011
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