Europe’s green shoots wither away

The eurozone's latest data shows the region needs more help than a rate cut. It may be time to settle in for a European depression.

It is never really clear what the real world difference is between a recession and a depression. There are cute textbook definitions but these mean nothing in the real world, particularly as news out of Europe overnight suggests that its economic performance is so poor, that it must be near a depression.

The economic news from the eurozone has seen it retain its position as a card carrying member of the low inflation club, while it has unfortunately locked in its almost exclusive rights to the guild of job destruction and record high unemployment.

Inflation in the eurozone eased to 1.2 per cent in the year to April, well below the 1.7 per cent recorded in March and a general consensus for a rise of 1.6 per cent. The underlying inflation rate which excludes energy, food, alcohol and tobacco, rose just 1 per cent confirming that core inflation is low and falling rapidly. In very simple terms, the near depression in the broader economy is biting on price pressures.

At the same time, the eurozone unemployment rate met the underwhelming expectations of market forecasters and rose to a record high 12.1 per cent in March. For the 27 countries in the wider Euro area, this translates to 26.52 million people being unemployed.

Greece and Spain had the highest unemployment rates, at 27.2 per cent and 26.7 per cent, respectively, rates that no serious economist or policy analyst would suggest is anything other than economic depression. The news was only marginally better in Portugal, Slovakia, Latvia, Cyprus, Ireland, Bulgaria, Italy, Hungry and France with each registering an unemployment rate at 11 per cent or more.

There were only three countries with an unemployment rate below 6 per cent and they were Austria, Germany and Luxembourg.

The story for youth unemployment remained socially as well as economically depressing. For people under the age of 25 years, the unemployment rate was 59.1 per cent in Greece, 55.9 per cent in Spain, 38.4 per cent in Italy and 38.3 per cent in Portugal.

With these sort of numbers, it remains unfathomable why the European Central Bank has not cut interest rates further and why there is still some residual doubt about whether it will deliver what is unquestionably a much needed interest rate cut when it meets this Thursday.

Previously, it was some made up concern about inflation that saw the ECB hold off moving interest rates below the current 0.75 per cent. The sharp fall in inflation in April, to be just a few tenths of a per cent above a record low, should finally calm the inflation hawks and see the ECB trim rates to 0.5 per cent. 

Certainly the economists at ANZ Bank expect an ECB rate cut this week, noting that the economic weakness in the eurozone is now spreading to the once solid Germany and that as a result, the ECB is not meeting its objective for price stability, with inflation falling too much.

Reinforcing that view was news for Germany that retail sales in real terms fell 0.3 per cent in March following a fall of 0.6 per cent in February to be down a substantial 2.8 per cent in the past year. Such is the weakness in retail spending in Germany that there is now a real risk, according to the markets, that GDP will fall, which would be bad news indeed when the bulk of the other countries in the eurozone are already going backwards.

There is a legitimate and serious question of whether a mere 25 basis point cut in interest rates will deliver much in the way of support to the economy. It won’t, but it will help. The ECB can continue to offer support to the countries which had difficulty funding their budget position, but the recent rally in yields means this is not all that necessary.

With fiscal austerity in place and still unfolding into the depressed economies, it does not bode well for the medium-term growth prospects of the eurozone which as a whole remains the largest economic group in the world economy accounting for close to a quarter of global output.

The year 2013 kicked off with a run of reasonable economic news in Europe. In recent weeks, those green shoots have withered. If anything, the downside risks to the economy are materialising and there is no end in sight to the economic deterioration.

This bodes poorly for China, which relies on the eurozone as its major export market. It might also explain why commodity prices remain weak, which is turn spells trouble ahead for Australia. It is not only ECB that needs to be cutting interest rates, but also our own Reserve Bank of Australia now urgently needs to cut rates when it meets next week.

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