Europe’s recovery strengthens, unemployment at 8-year low

Inflation is the missing link in bloc’s economic revival

BRUSSELS, July 31, (AFP): Europe’s economic recovery is strengthening with unemployment in the eurozone dropping in June to its lowest since February 2009, according to official figures released on Monday.

The jobless rate of 9.1 percent was better than predicted by analysts and will boost confidence that the 19-nation single currency area’s pick-up is gathering steam after the financial crisis.

Inflation in July however remained well below the European Central Bank’s target, meaning that it is likely to carry on for now with its massive economic stimulus policy and low interest rates.

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.

The highest unemployment rates were in struggling Greece, at 21.7 percent, and Spain at 17.1 percent.

Unemployment across the 28-nation 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.

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LONDON, July 31, (RTRS): Southern European government bond yields slipped on Monday as euro zone inflation for July remained well short of the European Central Bank target, thereby weakening the case for a rapid unwinding of monetary stimulus.

On Friday, euro zone yields had shot up across the board, with Germany’s 10-year borrowing costs hitting 19-month highs, after German inflation for July beat expectations, rising 1.5 percent rather than the 1.4 percent forecast by most.

But the move proved to be shortlived, as most analysts realised that this wasn’t enough of a surprise to significantly impact the figure for the entire bloc.

A flash estimate of euro zone inflation showed that consumer price rises in July were level with the month before, standing stable at 1.30 percent and in line with forecasts of economists polled by Reuters.

The ECB targets inflation of “just below 2 percent”.

Core inflation, at 1.3 percent, was at its highest in four years and unemployment was at its lowest since 2009, but this was still not enough to significantly move yields.

Reconsider

“It’s a step in the right direction but not quite enough to make the market reconsider bond prices,” said Mizuho strategist Antoine Bouvet.

“Tapering is already priced in, so while it’s good news and progress, it’s not something that would make the market reassess its view.”

Italian, Spanish and Portuguese bonds, seen as the biggest beneficiaries of central bank stimulus, outperformed the rest of the market, dropping 3-7 basis points.

Higher-rated government bond yields were broadly flat.

The gap between Portuguese and German 10-year borrowing costs tightened to its narrowest level since January 2016, at 232 basis points.

Large redemptions of Italian bonds due this week may also be pushing southern European government bond yields lower as investors have cash to reinvest, said Bouvet.

Current expectations are for the ECB to announce the tapering of its 2 trillion euro bond-buying scheme in the autumn, and then implement it in 2018.

Those expectations were built into bond prices over the last month. Germany’s 10-year borrowing costs are more than double what they were in late June, when the bloc’s top policymaker, Mario Draghi, said he was open to policy tweaks in a speech in Sintra, Portugal.

“I think the assessment of inflation will be in autumn when central banks come back from vacation,” said DZ Bank strategist Sebastian Fellechner.