The eurozone economy is slowing while inflation remains stubbornly high, data showed on Thursday in a mix that is likely to keep European Central Bank interest rates on hold for some time. Economic sentiment defied expectations that it would fall for the 12 straight month and stabilised in May.
But consumer sentiment hit its lowest since September 2005 heralding slowing eurozone growth, a monthly European Commission survey showed. "It is still pointing to a measured slowdown in GDP growth from the first quarter's 2.2 percent year-on-year to around 1.5 percent," said Jenifer McKeown, economist at Capital Economics.
Further signs of a slowdown came from the eurozone's biggest economy Germany, where unemployment unexpectedly rose in May for the first time in 2 years. Commerzbank said that "the best times are over for the (German) job market." Retail sales in Spain fell 3.4 percent year-on-year in April after a 5.5 percent drop in March, confirming weakening consumer demand as the eurozone's fourth-largest economy sinks into its worst slowdown in 15 years.
Meanwhile annual inflation in Spain surged a record of 4.7 percent in May and Belgium's price growth rocketed to a 23-year high of 5.2 percent, prompting remarks of concern from Belgian Prime Minister Yves Leterme. After prices jumped more than expected in Germany in May, overall eurozone inflation this month is likely to rebound again towards the March record of 3.6 percent, economists said.
The eurozone data is scheduled for Friday at 0900 GMT. "Today's numbers underpin the view that the eurozone is experiencing a mid-cycle slowdown, worryingly accompanied by high inflation," said Aurelio Maccario, chief eurozone economist at UniCredit.
ECB SEEN ON HOLD: Despite prospects for slower growth, the expected jump in eurozone inflation in May is likely to keep an ECB rate cut distant and the bank's rhetoric tough, even if prospects for an actual interest rate rise to fight price growth are slim.
ECB President Jean-Claude Trichet left no doubt about the bank's priorities in a newspaper interview on Thursday saying the ECB's job was to preserve price stability, as economic growth and jobs depended on that. "The overall stabilisation in eurozone economic sentiment in May will reinforce the ECB's belief that an interest rate cut is not warranted for some considerable time to come, particularly given elevated Euro zone inflation levels and risks," said Howard Archer, economist at Global Insight.
The ECB wants to keep inflation just below 2 percent and believes the inflation surge is temporary, even if protracted. It has kept interest rates unchanged at 4.0 percent since mid-2007.
In the newspaper interview, Trichet also stressed the importance of anchoring inflation expectations and the European Commission survey showed the bank may have some success there. Despite surging fuel and food prices, consumer inflation expectations over the next 12 months remained unchanged at 28 points in May and have remained in the 26-28 point range since the global credit crunch began in August 2007.
Still this is still the highest level since December 2001. Selling price expectations among businesses, however, inched up to 14 points from 13. "With inflation expectations holding at a high level, these figures will have done little to alter the ECB's hawkish stance," McKeown said.