Friday August 14, 05:50 PM
Record fall in eurozone consumer prices: EU
By Paul Harrington
BRUSSELS (AFP) - Consumer prices in the 16 euro countries fell a record 0.7 percent in July over 12 months, deepening the bloc's first ever dip into deflationary territory, EU data showed on Friday.
The figures poured some economic cold water on data released Thursday that showed Germany and France had emerged from recession in the second quarter, underlining the obstacles ahead towards a recovery.
The 0.7 percent eurozone price drop and the 0.1 percent fall seen in June mark the first-ever foray into negative inflation since the euro bloc was formed in 1999 and a remarkable U-turn for Europe's economy.
The news partly accounted for a weakening of the euro against the dollar and a general fall in European stock prices, traders said.
After hitting a record high of 4.0 percent in June and July 2008, eurozone inflation has fallen sharply as oil and other commodity prices have collapsed in the face of the global economic downturn.
The negative figures published on Friday are mainly due to the high energy and food prices seen last July, a European Commission spokesman said.
"The energy and food prices were very high in July last year compared to July this year," he said.
Most economists expected that eurozone inflation would dip briefly into negative territory but they have ruled out a longer downward spiral in prices like the one during Japan's "lost decade" in the 1990s.
While the prospect of falling prices may delight consumers it can wreak havoc on the broader economy as households put off purchases hoping for future bargains, undermining demand and in turn investment in new production.
That then puts further pressure on employment, causing further falls in demand and so setting up a dangerous vicious circle which can potentially cripple an economy.
"According to our last oil prices and exchange rate forecasts, eurozone inflation should have now bottomed out but would remain negative until October," said Cedric Thellier, eurozone economist for French bank Natixis (Paris: FR0000120685 - news) .
Prices fluctuated widely among eurozone nations, from consumer price rises of 0.7 percent in Greece and 0.8 percent in Malta to an annual fall of 2.6 percent in Ireland, which was the first eurozone country to enter recession.
While prices still edged upwards in July in the 27-nation EU as a whole, the 0.2 percent inflation rate was itself a record low.
Official figures released Thursday had offered hopes that there are at least some green shoots of economic recovery.
The eurozone economy contracted by just 0.1 percent in the second quarter, as Germany and France unexpectedly emerged from recession, both registering 0.3 percent GDP growth, the figures showed.
Those estimates fuelled hopes that the eurozone's biggest hitters can pull the others out of the worst recession the region has known since 1945, although analysts said the data should be treated with caution.
The European Trade Union Confederation said Friday that "claims that France and Germany have turned the corner and are climbing out of recession are premature."
"No one can afford complacency or self congratulation, when the need is to inject more growth and more jobs into the economy," said ETUC Secretary General John Monks.
The euro dipped to 1.4283 dollars, from 1.4287 dollars in New York late Thursday, on profit-taking after a rally a day earlier in the wake of Thursday's surprisingly positive eurozone economic data.
Europe's main stock markets fell, with a weak report on US consumer sentiment also triggering renewed caution about the prospect of an economic recovery and prompting investors to lock in gains from the recent rally.
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