Weak European inflation bolsters case for stimulus

BRUSSELS (AP) – Inflation in the 19-country eurozone was stuck at a low annual rate of one per cent in August, potentially bolstering the argument for the European Central Bank (ECB) to provide more stimulus to the economy when it meets next month.

Statistics agency Eurostat said yesterday that the inflation rate was the same as in July, as energy prices were down from a year earlier and price gains for industrial goods and services remained subdued.

Weak price increases can be a sign of economic stagnation, and inflation is currently well below the ECB’s goal of just under two per cent.

The central bank is due to next meet on September 12 and some analysts believe it will cut interest rates or even resume a bond-buying stimulus programme in an attempt to boost lending and economic activity. The eurozone economy grew by a quarterly rate of only 0.2 per cent in April-June, with Germany contracting.

In particular, the manufacturing sector and exports in key European economies are taking a heavy blow from uncertainty related to the trade war between the US and China as well as Brexit.

But other parts of the economy remain upbeat, such as the labour market, which has been improving consistently in recent months and years.

Separate data released yesterday showed that the eurozone’s unemployment rate was at 7.5 per cent in July, the same as in June. It has been falling consistently since 2013, when it was over 12 per cent in the midst of the eurozone’s debt crisis.

The labour market is particularly strong in Germany, where unemployment is just three per cent, according to Eurostat.

While Germany’s economy shrank in the second quarter and could slide into recession, analysts say that the strong labour market should cushion the blow if the downturn is not protracted.

The European economy could take a heavier hit if Britain leaves the EU without a divorce deal on October 31, causing widespread disorder and uncertainty for businesses and people.

And also if the trade disputes heat up further – in particular if United States (US) President Donald Trump imposes new tariffs on European cars.