Eurozone exits deflation, but dangers still loom

Trading floor of Frankfurt's stock exchange

Trading floor of Frankfurt's stock exchange lighted during Frankfurt's biannual "Luminale" light festival [Travel Aficionado/Flickr]

The eurozone exited four months of deflation in April, official data showed on Thursday (30 April), reversing a dangerous bout of declining prices. But problems remain, and the recovery is weak.

Inflation in the 19-nation single currency bloc hit zero percent in April, after a drop of 0.1% in March, with low energy costs still impacting the cost of living, the EU statistics agency Eurostat said on Thursday (30 April).

The data will help vindicate the historic decision by the European Central Bank in March to launch a controversial, more than 1.0 trillion euros stimulus programme to banish the spectre of deflation from the eurozone.

The ECB said its measures appeared to have worked.

“After having reached low levels in mid-January.. the decline (in inflation) observed over the previous two years has thus come to a halt,” the ECB wrote in its latest economic bulletin.

Eurozone prices first fell into negative territory in December with a minus 0.2% figure followed by a much worse minus 0.6% in January, spooking analysts.

Economists fear deflation almost as much as rampant inflation because shoppers tend to put off purchases in the belief they may be cheaper in the future. This leads to a spiral of ever weaker demand, slowing the economy and pushing up unemployment.

It also makes slashing public debt and deficits much harder, a stark challenge to overspending countries like France and Italy.

Despite exiting deflation, after stripping out volatile energy and food prices, so-called core inflation still stood at a record low 0.6%, the same as in March, Eurostat said.

“It is too early to conclude that the threat of deflation has lifted altogether,” said Jonathan Loynes, economist at Capital Economics.

“It could yet return if oil and other commodity prices fall again,” he added.

Unemployment unchanged, slow progress

Unemployment was unchanged at 11.3% in March compared to February, Eurostat said, and down from 11.7% a year before.

“This is not yet a sign of fading disinflationary pressures, as the painfully slow decline in unemployment evidenced in today?s unemployment data for March reminds us,” said Christian Schulz of Berenberg Bank.

“Overall unemployment dropped by 36,000 in March, but, at that pace, it would take 14 years to return to pre-crisis levels,” Schulz said.

As usual, the level of joblessness varied widely across the across the eurozone.

Unemployment in powerhouse Germany was unchanged at 4.7%, the lowest rate in the 19-nation single currency bloc.

The highest rate was in debt-stricken Greece, at 25.7% in January, the latest data available, which was slightly lower than 25.9% a month earlier.

Youth unemployment in Greece and Spain stood at a huge but lower 50.1% in both countries.

Worryingly, Italy, the eurozone’s third biggest economy, saw the jobless rate continue to rise to 13%, up from 12.7% in February.

EU-wide, unemployment in the 28 member states was also unchanged at 9.8%.

A week ahead of a general election, Britain’s jobless rate was at a low 5.5%, according to January data, a huge drop from 6.9% a year before in what could be good news for incumbent Prime Minister David Cameron.


Eurozone inflation has been stuck in the European Central Bank's 'danger zone' of below 1% since October 2013 and coupled with weak growth poses a risk for the recovery.

This has led the United States to issue an unusual warning last October, calling on Germany to act to prevent a downward spiral of falling wages and prices.

>> Read: US warns Europe on deflation, calls on Germany to act

The ECB launched a raft of measures to fight low inflation and boost the euro zone economy.

In June last year, it lowered the deposit rate to -0.1%, meaning it will effectively charge banks for holding their money overnight. It cut its main refinancing rate to 0.15%, an all-time low, and the marginal lending rate - or emergency borrowing rate - to 0.40%.

It also promised up to €1 trillion in cheap long-term loans to banks from September, and kept the door open to a programme of large-scale asset purchases, known as quantitative easing (QE).

>> Read: ECB cuts rates below zero to boost recovery in the eurozone

The ECB went further in September by cutting its main refinancing rate to 0.05%, raising the penalty for banks for keeping money overnight in central bank deposits to 0.20%, and announcing a new programme of asset-backed securities and covered bond purchases.

>> Read: ECB rate cut boosts Spanish, Italian yields

In August, French President François Hollande urged the ECB and Germany to do more to boost growth and fight a "real deflationary risk" in Europe.

>> Read: Hollande urges ECB to 'inject liquidity in the economy'

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