Hopes for a recovery in the eurozone suffered another blow on Wednesday with figures showing industrial output fell for a second successive month.
Production declined across the 18 eurozone members by an average 0.3%, with a return to growth in France and Italy offset by falls in Ireland and the Netherlands and slow progress in Germany, which struggled to 0.2% growth.
Spain was the worst hit of the currency bloc's major economies with a 0.8% drop in industrial production. It also suffered the sharpest drop in shop prices for five years, undermining Madrid's claim that a rebound in employment last month was a clear indication of the country's return to sustained growth.
Spanish consumers have proved reluctant to spend on the high street while unemployment remains at around 25%, forcing shops to offer bigger discounts in July than June.
Weakness across the manufacturing, energy and mining sectors will pose a problem for Brussels and the European Central Bank (ECB), ahead of second-quarter GDP figures on Thursday that are expected to show a further slowdown from the 0.2% growth in the first three months of the year.
The €9.6tn economy is struggling to gain momentum with its recovery a year after exiting recession. High unemployment, sluggish reforms and the fallout from conflict in Ukraine, Gaza and Iraq are holding it back.
The latest sign of just how fragile the eurozone's economic rebound remains came this week, after German investor sentiment dropped to its lowest level since December 2012 on concerns that European sanctions against Russia will harm exports.
Brussels and the ECB have pleaded for more time to allow policies to work. Brussels has emphasised the need for governments to bring annual spending deficits under control as a prerequisite for extra support, while the ECB has set a high bar for further measures to ease credit and support borrowing.
Mario Draghi, the ECB president, said last week at the central bank's monthly press conference that inflation remained on target to be 2% or just below in the medium term.
This was in spite of a slide further into what the central bank has previously described as a "danger zone" when prices in the single currency area rose by only 0.4% in the year to July, down from 0.5% in June.
Critics of the ECB's stance have argued that low rates of inflation reflect the weakness of the economy and have called for a more coordinated intervention to boost investment and bolster consumer confidence.
The ECB is under pressure to match the US Federal Reserve and the Bank of England with the introduction of quantitative easing (QE), which involves huge buying of government bonds to drive down long-term interest rates, cutting the cost of borrowing.
Draghi has said the ECB's ruling council is ready to launch its own version of QE, but will act only if it sees clearer signals the eurozone economy is heading back into recession.
Adding to the pressure on Draghi, Spain's National Statistics Institute reported a drop in prices of 0.4% for July. In the previous month, Spain's economy, the fourth largest in the eurozone, had reported an annual inflation rate of zero.
Prices were kept down by the lower cost of entertainment, electricity, tobacco, food and soft drinks, the official statistician said. Chris Williamson, chief economist at financial data provider Markit, said the ECB would wait to see whether limited measures put in place in June had an effect before adopting QE.
"The disappointing performance of the economy in the second quarter will do little to affect policy. Draghi has already largely dismissed the weakness to temporary factors, notably a higher than usual number of holidays having not been accurately reflected in the seasonal adjustment of data. "It seems that the bar to further stimulus remains high.
Not only does the ECB emphasise that prior stimulus should boost growth and inflation sufficiently, but Draghi continues to stress that national governments need to speed up structural reforms," he said.
Peter Vanden Houte, a eurozone analyst at ING Financial Markets, said: "With the geopolitical tensions not cooling down for the time being, there is little likelihood that the growth pace will accelerate in the second half of the year.
The ECB will be pressured to undertake additional action if some of the downside risks materialise. "However, as the ECB already all but emptied its toolbox in June, the next step would be full-blown QE, something still considered to be a bridge too far for the majority of the governing council members."
theguardian.com
Production declined across the 18 eurozone members by an average 0.3%, with a return to growth in France and Italy offset by falls in Ireland and the Netherlands and slow progress in Germany, which struggled to 0.2% growth.
Spain was the worst hit of the currency bloc's major economies with a 0.8% drop in industrial production. It also suffered the sharpest drop in shop prices for five years, undermining Madrid's claim that a rebound in employment last month was a clear indication of the country's return to sustained growth.
Spanish consumers have proved reluctant to spend on the high street while unemployment remains at around 25%, forcing shops to offer bigger discounts in July than June.
Weakness across the manufacturing, energy and mining sectors will pose a problem for Brussels and the European Central Bank (ECB), ahead of second-quarter GDP figures on Thursday that are expected to show a further slowdown from the 0.2% growth in the first three months of the year.
The €9.6tn economy is struggling to gain momentum with its recovery a year after exiting recession. High unemployment, sluggish reforms and the fallout from conflict in Ukraine, Gaza and Iraq are holding it back.
The latest sign of just how fragile the eurozone's economic rebound remains came this week, after German investor sentiment dropped to its lowest level since December 2012 on concerns that European sanctions against Russia will harm exports.
Brussels and the ECB have pleaded for more time to allow policies to work. Brussels has emphasised the need for governments to bring annual spending deficits under control as a prerequisite for extra support, while the ECB has set a high bar for further measures to ease credit and support borrowing.
Mario Draghi, the ECB president, said last week at the central bank's monthly press conference that inflation remained on target to be 2% or just below in the medium term.
This was in spite of a slide further into what the central bank has previously described as a "danger zone" when prices in the single currency area rose by only 0.4% in the year to July, down from 0.5% in June.
Critics of the ECB's stance have argued that low rates of inflation reflect the weakness of the economy and have called for a more coordinated intervention to boost investment and bolster consumer confidence.
The ECB is under pressure to match the US Federal Reserve and the Bank of England with the introduction of quantitative easing (QE), which involves huge buying of government bonds to drive down long-term interest rates, cutting the cost of borrowing.
Draghi has said the ECB's ruling council is ready to launch its own version of QE, but will act only if it sees clearer signals the eurozone economy is heading back into recession.
Adding to the pressure on Draghi, Spain's National Statistics Institute reported a drop in prices of 0.4% for July. In the previous month, Spain's economy, the fourth largest in the eurozone, had reported an annual inflation rate of zero.
Prices were kept down by the lower cost of entertainment, electricity, tobacco, food and soft drinks, the official statistician said. Chris Williamson, chief economist at financial data provider Markit, said the ECB would wait to see whether limited measures put in place in June had an effect before adopting QE.
"The disappointing performance of the economy in the second quarter will do little to affect policy. Draghi has already largely dismissed the weakness to temporary factors, notably a higher than usual number of holidays having not been accurately reflected in the seasonal adjustment of data. "It seems that the bar to further stimulus remains high.
Not only does the ECB emphasise that prior stimulus should boost growth and inflation sufficiently, but Draghi continues to stress that national governments need to speed up structural reforms," he said.
Peter Vanden Houte, a eurozone analyst at ING Financial Markets, said: "With the geopolitical tensions not cooling down for the time being, there is little likelihood that the growth pace will accelerate in the second half of the year.
The ECB will be pressured to undertake additional action if some of the downside risks materialise. "However, as the ECB already all but emptied its toolbox in June, the next step would be full-blown QE, something still considered to be a bridge too far for the majority of the governing council members."
theguardian.com
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