Europe’s jobs mar­ket is heal­ing, but wages weak In­fla­tion is the miss­ing link in re­gion’s eco­nomic re­vival

Kuwait Times - - BUSINESS -

The euro­zone econ­omy is heal­ing nicely but in­fla­tion re­mains weak - good news for con­sumers in the short run but a sign of un­der­ly­ing weak­ness in wages and com­pa­nies’ pric­ing power. That’s the take-away from eco­nomic re­ports re­leased yes­ter­day that showed while the un­em­ploy­ment rate in the 19-coun­try cur­rency union fell to its low­est in eight years, price in­creases are mod­est.

The num­ber of peo­ple in work rose by 148,000 in June, the Euro­stat statis­tics agency said yes­ter­day, bring­ing the un­em­ploy­ment rate to 9.1 per­cent, from 9.2 per­cent in May. That echoes re­ports in re­cent weeks of ris­ing busi­ness ac­tiv­ity and con­fi­dence across all euro­zone coun­tries - even those, like Greece, that have been hit hard­est by fi­nan­cial trou­bles.

Such im­prove­ments have em­bold­ened the Euro­pean Cen­tral Bank to con­sider when it might sig­nal a phas­ing out of its bond-buy­ing stim­u­lus pro­gram, un­der which it pumps 60 bil­lion eu­ros ($70 bil­lion) a month into the econ­omy. ECB Pres­i­dent Mario Draghi has said it would likely con­sider such a move in the fall.

But the miss­ing piece in the euro­zone’s re­cov­ery is a sig­nif­i­cant rise in in­fla­tion, which the ECB is tasked with get­ting to just un­der 2 per­cent. While weak in­fla­tion can be good for shop­pers, it points to fragili­ties in the econ­omy: wages are not ris­ing quickly enough to spur spend­ing or com­pa­nies may not be con­fi­dent enough in con­sumers to raise their prices. In July, the an­nual in­fla­tion rate was stuck at 1.3 per­cent. And what gains there were mostly due to en­ergy price in­creases of 2.2 per­cent. Ex­clud­ing volatile items like en­ergy, food, al­co­hol and tobacco, prices were up a still-mod­est 1.2 per­cent. The in­dus­trial goods sec­tor saw prices rise a mere 0.5 per­cent.

The miss­ing link

Econ­o­mists say in­fla­tion is un­likely to rise sub­stan­tially as long as there re­mains slack in the la­bor mar­ket that pre­vents wages from ris­ing sig­nif­i­cantly. “While June’s un­em­ploy­ment data paint a pos­i­tive pic­ture of the euro­zone la­bor mar­ket, July’s (in­fla­tion) re­lease con­firms that this strength has yet to gen­er­ate in­fla­tion­ary pres­sure,” said Jen­nifer McKe­own, chief Euro­pean econ­o­mist at Cap­i­tal Eco­nom­ics in Lon­don. She ex­pects the ECB to start ta­per­ing off its bond-buy­ing pro­gram next year, but says “in­ter­est rate hikes are a pretty dis­tant prospect.”

The in­fla­tion rate in par­tic­u­lar was “very sub­dued”, said Jen­nifer McKe­own of Cap­i­tal Eco­nom­ics. “While June’s un­em­ploy­ment data paint a pos­i­tive pic­ture of the euro­zone labour mar­ket, July’s (in­fla­tion) re­lease con­firms that this strength has yet to gen­er­ate in­fla­tion­ary pres­sure,” McKe­own said. The fig­ures come a week af­ter the IMF said the euro­zone eco­nomic re­cov­ery was broad and strength­en­ing, but warned that low in­fla­tion, frag­ile banks and Brexit re­mained sig­nif­i­cant risks.

The Euro­stat statis­tics agency said un­em­ploy­ment fell to 9.1 per­cent in June com­pared to a re­vised 9.2 per­cent in May. That was slightly bet­ter than the 9.2 per­cent pre­dicted by an­a­lysts sur­veyed for data com­pany Fac­tset. “This is the low­est rate recorded in the euro area since Fe­bru­ary 2009,” Euro­stat said in a state­ment, when the Euro­pean econ­omy was still in the dol­drums af­ter the global fi­nan­cial cri­sis.

Per­sis­tent and pa­tient

The high­est un­em­ploy­ment rates were in strug­gling Greece, at 21.7 per­cent, and Spain at 17.1 per­cent. Un­em­ploy­ment across the 28na­tion EU was mean­while sta­ble at 7.7 per­cent in June, the low­est rate for the bloc since De­cem­ber 2008. Euro­zone in­fla­tion mean­while held at 1.3 per­cent in July, match­ing es­ti­mates by Fac­tset. In­fla­tion is a key in­di­ca­tor of un­der­ly­ing con­sumer de­mand.

The ECB has a tar­get rate of close to, but just be­low 2.0 per­cent, with the aim of en­sur­ing a mod­est but sus­tained in­crease in prices, which are a sign of a healthy econ­omy.

To achieve this, the ECB has set in­ter­est rates at his­toric lows and poured hun­dreds of bil­lions of cheap eu­ros into the bank­ing sys­tem to stim­u­late ac­tiv­ity. Fi­nally, af­ter years of try­ing, the econ­omy has shown signs of a mod­est but broad pick-up this year, lead­ing to calls on ECB chief Mario Draghi to turn off the easy credit tap. Draghi last week played down sug­ges­tions the in­sti­tu­tion might soon wind down the stim­u­lus, say­ing pol­i­cy­mak­ers must be “per­sis­tent and pa­tient” faced with low in­fla­tion.

Ob­servers are eye­ing the bank closely for signs it may soon end its monthly bond pur­chases of 60 bil­lion eu­ros ($69 bil­lion) per month. Just three mon­e­tary pol­icy meet­ings re­main be­fore De­cem­ber, when the “quan­ti­ta­tive eas­ing” (QE) pur­chases are presently set to ex­pire. —Agen­cies

TOKYO: A woman looks at a fash­ion bou­tique with sales signs at Ginza shop­ping district in Tokyo yes­ter­day. Ja­pan’s fac­tory out­put rose in June, while un­em­ploy­ment fell to 2.8 per­cent, as a re­cov­ery in global de­mand helped drive growth in the world’s third-largest econ­omy. —AP

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