European Producer Prices Decline Most in 22 Years (Update2)
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By Simone Meier
May 5 (Bloomberg) -- European producer prices dropped the most in 22 years in March, fanning deflation concerns and adding to the case for more action by the European Central Bank to revive economic growth.
Factory-gate prices in the 16-nation euro region fell 3.1 percent from a year earlier, after a 1.7 percent drop in February, the European Union’s statistics office in Luxembourg said today. That was the biggest decline since February 1987 and steeper than the 2.9 percent drop economists forecast, according to the median of 13 estimates in a Bloomberg News survey.
European companies are lowering prices and eliminating jobs to weather the worst economic slump since World War II just as plunging energy costs are pushing the 16-member euro region closer to deflation. While the ECB may cut its key interest rate to a record low this week, President Jean-Claude Trichet has declined to comment on what other steps the central bank may take to stem the recession.
“We’re in an environment where prices are falling on a broad front and all important indicators will turn negative this year,” said Karsten Junius, a senior economist at Dekabank in Frankfurt. “The deflation threat has clearly increased. The ECB will carefully monitor any further developments.”
Trichet has said euro-area consumer prices may turn negative on an annual basis for some time around mid-year, though he expects inflation to pick up in the second half. ECB Executive Board member Juergen Stark said on April 29 that he considers the threat of deflation as “very low.”
Benchmark Rate
The ECB’s 22-member Governing Council on May 7 will probably lower the benchmark rate by 25 basis points to 1 percent, according to a Bloomberg survey of economists. That would be the lowest level since the bank took charge of monetary policy in 1999.
“The bank still seems too complacent about the possibility of a more-prolonged period of falling prices,” said Martin van Vliet, senior economist at ING Bank in Amsterdam. “Further unconventional policy easing is needed to counter the risk of a prolonged period of below-target inflation” and to ensure against “outright deflation.”
The euro-area economy may shrink 4 percent this year and 0.1 percent in 2010, the European Commission said yesterday, cutting its forecast to show a contraction twice as deep as it projected three months ago. The commission expects inflation to average 0.4 percent this year, which would be the lowest since the euro’s introduction a decade ago.
‘Extremely Challenging’
Munich-based MAN AG, Europe’s third-largest truckmaker, is suspending some production for 70 days in the first half and may continue with shorter workweeks for the rest of 2009 to get through the recession. Cie. de Saint-Gobain SA, Europe’s largest supplier of building materials, said last week that it is deepening its cost-cutting program to counter a slump in demand.
“There is no data giving us confidence that we have reached the bottom of the crisis,” Saint-Gobain Chief Executive Officer Pierre-Andre de Chalendar said on April 29. The rest of the first half “will be extremely challenging.”
March producer prices dropped 0.7 percent from February, when they declined 0.4 percent, the statistics office said.
European consumer-price inflation remained at 0.6 percent in April, an initial estimate showed last month. That is less than half the ECB’s 2 percent ceiling and the lowest rate since the data were first compiled in 1996. Detailed April figures are scheduled to be released on May 15.
Energy Prices
At the producer level, energy prices fell 7.3 percent in March from a year earlier, the biggest decline since November 2001, the statistics office said. From the previous month, energy prices declined 1.7 percent. Core producer prices, which exclude energy and construction, fell 1.7 percent in March from a year earlier.
“Underlying inflationary pressures are depressed across the euro zone and reinforce the belief that a period of deflation is likely,” said Howard Archer, chief European economist at IHS Global Insight in London. “Thus it looks a stone dead certainty that the ECB will cut rates by a further 25 basis points to 1 percent and also announce significant non- conventional measures” on May 7. |
