Euro-zone inflation slipped into negative territory in June, highlighting the challenge European Central Bank policy makers face in balancing a mandate to contain price declines with their desire to hold off on more measures to ease the recession.
Consumer-price inflation in the 16 countries that share the euro currency fell 0.1% this month, down from May's flat reading, according to a Tuesday estimate from European statistics agency Eurostat. June's rate is the lowest since comparable records began in 1997. Economists at the Royal Bank of Scotland estimate inflation in Europe's economic heartland hasn't been as low since 1953.
The bulk of the June decline likely stems from lower energy prices, but economic weakness also is helping pull down prices. ECB policy makers, who are slated to meet Thursday, aim to keep annual inflation just below 2%. They have long warned that energy prices would push the bloc's inflation rate into negative territory for a few months this summer. The central bank maintains that deflation - a prolonged decline in wages and prices - is unlikely, though some economists say the risk is rising.
Data out Tuesday underscore the grim state of the euro-zone economy, despite some recent signs of stabilization. Germany's seasonally adjusted jobless rate rose to 8.3% in June from 8.2% in May, according to the Federal Labor Agency. Government-sponsored salary subsidies for employees working shorter hours have helped contain unemployment in Europe's largest economy, but economists warn waning global demand will spur mass layoffs and push the jobless rate above 10% by mid-2010.
Spanish property prices fell 7.6% in the first quarter of this year compared with a year earlier, the fastest pace since records began in 1995 and well above the 5.4% drop logged in the final three months of 2008, the National Statistics Institute reported. In Ireland, which like Spain is struggling amid a burst housing bubble, annual economic output slipped 8.5% in the first quarter of 2009, worse than the 8% fall in the fourth quarter of 2008, according to its Central Statistics Office.
Outside the euro zone, the U.K. economy posted its sharpest decline since 1958 in the first quarter, suggesting the recession has been harsher than thought previously. (See related article.) The Office for National Statistics reported the economy slumped 2.4% in the first quarter compared with the quarter before, as a steep decline in construction activity helped push output down from an initial estimate of a 1.9% decline. Chief Secretary to the Treasury Liam Byrne said Tuesday the data revision didn't change the government's view that the economy will start growing again by year-end.
The dismal euro-zone data highlight the dilemma ECB rate-setters face as they meet Thursday. Policy makers have signaled they aren't inclined to cut their key rate below the current record-low 1% or expand their lending programs, which include a €60 billion ($84.48 billion) plan to buy low-risk bonds, without a substantial deterioration in the economic outlook. Analysts expect the ECB's key rate will stay on hold through year-end.
There were signs Tuesday that the ECB's move last week to lend euro-zone banks €442 billion in one-year funds is helping ease money-market strains. A benchmark for the rate at which euro-zone banks lend to one another for three months - which is a key gauge for household and business loans across the bloc - fell to a record low of 1.099% Tuesday from 1.108% Monday.
But bleak lending data suggest banks aren't passing along the ECB's measures to the real economy in full. ECB data Tuesday showed annual growth in loans to the private sector slowed to 1.8% in May, down from 2.3% in April and the lowest since records began in 1992. The fall bolstered some economists' contentions that the ECB will need to unveil more measures to counter a rising deflationary threat.
"None of the ECB's operations to date has been successful in pushing credit growth in the economy," said RBS economist Jacques Cailloux. "We think credit growth will be negative toward year-end and will stay negative for a long time, which is one of the reasons we think [the ECB] might be forced to implement other asset-purchase programs."
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