Both France and Spain on Friday reported a sharp drop in inflation in September, giving the European Central Bank more freedom to cut borrowing costs again at its next meeting in October.
Troubling signals for the eurozone’s economy suggest that it is in increasing need of relief in the form of lower interest rates, which make investment cheaper and encourage spending.
The latest of those came on Friday, as Germany — Europe’s largest economy — reported that the number of people out of work hit its highest level in nearly four years. Recent business surveys — notably S&P Global’s Purchasing Managers Index (PMI) for September — have suggested that the German economy has gone into reverse and that the eurozone’s has stalled.
“The PMIs have emphasized downside risks, and a soft inflation print early next week could be enough to tilt the majority in the Governing Council in favour of another cut as early as at the October meeting,” Nordea analyst Jan van Gerich said in a note to clients.
“The economic stagnation in Germany appears to have continued,” Germany’s Employment Agency said in its monthly report. “Output fell at the start of the third quarter, private consumption has not so far shown any sign of reviving and leading indicators are again getting bleaker.”
Earlier, numbers released by France’s statistical agency showed that the headline rate of inflation fell to 1.5 percent in September — the lowest reading since July 2021. In Spain, meanwhile, headline inflation slowed to 1.7 percent, from 2.4 percent in August. Both the French and Spanish readings were well below analysts’ expectations of 1.9 percent, and were clearly below the ECB’s medium-term target of 2 percent.
Consumer prices also fell on a month-on-month basis in both countries, helped mainly by decreasing energy prices. Oil prices, an important factor in short-term inflation dynamics, have in recent weeks slumped to their lowest in three years in response to signs of economic weakness in the United States, China and Europe.
However, the ECB still expects inflation to climb back above target in the last three months of the year. Eurostat will release preliminary pan-eurozone inflation data for September on Tuesday.
ING economist Bert Colijn said in a note to clients that the ECB’s focus is now shifting from worries around inflation, to how to prop up growth.
“For the ECB, this means that the pressure to lower interest rates from current restrictive levels quickly will increase,” said Colijn.
After the bank’s rate cut earlier this month, most had expected it to hold off until December before moving again given that this would coincide with its next update of forecasts for growth and inflation. However, some — such as Bank of Portugal Governor Mario Centeno — had urged the ECB to keep its options open, given the changing economic situation.
That’s due not least to the fact that the eurozone labor market, which has largely remained resilient to the economic problems caused by Russia’s invasion of Ukraine, is starting to look less healthy. Vacancies have fallen around the region; while in Germany, the seasonally adjusted jobless rolls rose by 17,000 this month to 2.8 million, the highest since late 2020.
German manufacturing has been struggling with a combination of high energy prices and competition from abroad, especially from China. Earlier in September, flagship automaker Volkswagen announced it was considering shutting a plant in Germany — an unprecedented move in its 87-year history. Hopes for job creation in newer industries, meanwhile, have also taken a knock since chipmaker Intel put on ice plans for a massive new factory in the eastern German city of Magdeburg.
“The consumer recovery could stall if the labor market cools any further,” said Marc Schattenberg of Deutsche Bank Research in emailed comments, although he noted employment was still tending slightly higher. It should, however, be noted that German employment data lag two months behind unemployment numbers.
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