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September 1, 2009

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Slower fall in euro zone prices

EURO zone prices fell more slowly in August from a year ago, a sign that the worst of the economic downturn may be over, the European Union statistics agency, Eurostat, said yesterday.

Inflation in the 16 countries that use the euro stayed negative for the third consecutive month in August as prices shrank 0.2 percent, far less than a 0.7 percent drop in July.

Eurostat revised the July inflation figure, saying it was worse than the milder 0.6 percent fall it reported earlier.

Lower prices for energy and other goods have caused the inflation rate to plunge from last summer, when oil hit record highs. The year-on-year rate fell to minus 0.1 percent in June and hit 0 percent in May.

European Central Bank officials say this disinflation is short-lived and that it is not the start of full-scale deflation - a downward price spiral that can harm the economy with a vicious circle of declining demand, worsening debt and job losses, as happened during the Great Depression of the 1930s.

Inflation is largely driven by oil prices, which have dropped by more than half from an all-time high of US$147 a barrel last July to US$72 in early trading in Asia yesterday.

Demand also stalled earlier this year at home and abroad as euro zone nations lost the major crutch of high export sales to emerging nations that had sheltered major exporters such as Germany from the downturn.

Sales are now picking up from a very low level as businesses start to restock after freezing purchases for several months. Euro zone business and consumer confidence rose in August as companies said they now expect more exports, more domestic orders and higher output.

But the recovery looks fragile as industrial output stays subdued.

France and Germany - the euro zone economy's twin engines - technically emerged from recession in the second quarter.


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