Global Daily – Eurozone inflation melting away

by: Aline Schuiling , Peter de Bruin

140331-Global-Daily-Insight.pdf ()
  • Eurozone inflation looks set to fall further in March, with periphery seeing deflation
  • US personal consumption disappoints, suggesting softer-than-expected first quarter growth,…
  • …but consumption set for a rebound, helped by a stronger labour market recovery and wealth effects

Inflation in Germany and Belgium eases, …

Germany’s harmonized HICP inflation rate fell from 1.0% in February to 0.9% in March. Detailed regional data show that the decline was due to a sharp drop in food price inflation, a drop in the volatile inflation rate of package holidays, and a decline in the yoy change in prices of clothing and shoes. The latter was probably due to early discount sales after the exceptionally mild winter. Meanwhile, energy price inflation became somewhat less negative in March, after it had dropped in the previous few months. Belgium and Spain also published inflation data for March on Friday. As in Germany, inflation in Belgium fell from 1.0% to 0.9%. In Spain, inflation moved into negative territory for the second time in the past six months, falling from 0.1% to -0.2%. The declines in Germany, Belgium and Spain are in line with our forecast that eurozone inflation fell from 0.7% in February to 0.5% in March (data published today). Looking forward, we expect inflation to edge even a touch lower in the coming months and subsequently move roughly sideways for a considerable time. It will probably be weighed down by food and energy prices, the strong euro and a persistent amount of economic slack. Against this background, we think there is a strong case for the ECB to ease monetary policy further, but the central bank has shown a tolerance for low inflation and we think it will sit on its hands at this week’s Governing Council meeting.



… while Spain moves further into negative territory

Spain is not the only country where inflation has moved close to or below zero in recent months. It is joined by Greece, Portugal and Ireland, which all have experienced relatively deep and long recessions, sharp rises in unemployment and drops in wages in recent years. Moreover, they have gone through a process of economic reforms, which has supported productivity growth and contributed to sharp falls in unit labour costs, as part of a process of internal devaluation and rebalancing within the eurozone. We expect inflation in these countries to remain well below the eurozone average this year and next. The gap should narrow over time though, as their economies have returned to growth and unemployment has either fallen or stabilized.

US personal consumption disappoints,…

Meanwhile, in the US, last Friday’s personal spending figures painted a picture of weaker-than-expected consumer spending. Although real spending was up by 0.2% in February, which equaled the consensus forecast, January’s estimate was lowered by two tenths to 0.1%. This reflected that the dire winter weather in January caused both durable and non-durable consumption to decline more than earlier thought, while services inflation was also a tad weaker. Moreover, the level of spending in the fourth quarter of last year was revised down as well, implying that the first quarter started from a weaker basis. The big picture is that real consumption in the first quarter was weaker than we earlier thought, even allowing for a substantial amount of payback for the softness in spending in the past months in March. As a result, we lowered our Q1 GDP tracking estimate from 2.2% to 1.8% qoq saar.

…but outlook for spending is sound

Still, the outlook for consumption is very sound. For a start, the pace of fiscal consolidation has fallen sharply. Secondly, judging from the initial jobless claims series, it should not take long for the labour market recovery to start gaining traction. Indeed, we would not be surprised to see a substantial strengthening in job growth in this Friday’s nonfarm payrolls report. Finally, the strong gains in stock and house prices that we saw last year helped households’ net worth to surge by almost $10 trillion dollars. This will reduce the necessity of households to save, most likely leading to a decline in the savings rate, and allowing a greater share of income to be consumed. We expect consumer spending and overall economic growth to rebound sharply in coming months.