The Euro Zone showed a successful path towards recovery, with the release of upbeat data one after another, reflecting the fast paces the economy is undertaking with the wise interventions by the European Central Bank (ECB). Now, there are more hopes that the economy may recover faster than the ECB expected in its latest announcements, referring to that the economy may recover by the second half of next year.
The 16-nation economy is continuing its ongoing improvement in the third quarter, after the release of optimistic data in the second quarter. GDP for the second quarter showed an ease in contraction to 0.1% from 2.5% contraction; the lowest since 1995, during the first quarter. If the economy continues at this pace, we could expect to see growth starting to spur from the third quarter, especially with the ongoing efforts by the ECB and national governments to shore up the economy.
Today, the euro area is releasing significant data, ahead of the interest rate decision and Trichet's speech. Retail Sales for July are expected to be released with expectations of progress. On the month, the rate is predicted to come in at 0.1% from -0.2%; while on the year, the reading is estimated to incline to -2.2% from -2.4%. PMI Services' final reading will also be released today, with expectations remaining unchanged at 49.0; whereas the PMI Composite is anticipated to remain steady at 50.0 as well.
Retail Sales in the euro zone are expected to show improvement this month, after the advance that was signaled in the previous period. However, retail sales are undertaking slow paces, since consumer income is still being impacted by the economic recession, which drove many firms to shed employees and cut income. The softening labor market conditions are still weighing on the economy and threatening recovery.
Euro Zone's unemployment rate for July surged to 9.5%, the highest since September 1999; from 9.4% in June, which means that many companies are still terminating employees to cut expenses to regain profits.
On the other hand, PMI services for the same month rose to its highest in a year and a half, while PMI composites reached the 50.0 barrier, the best record since more than a year. The incline was led by Germany, where PMI Services showed an expansion to 54.1. The index in Germany is also expected to linger at the same figure, when it is released later on today. In France, PMI Services climbed to the highest level since September 2008.
The ECB slashed the benchmark interest rate to a record low of 1% to boost the economy, amid the undergoing economic downturn. In addition, the bank started purchasing bonds worth 60 billion euros with new printed money since July 6, to support markets with liquidity, thereby reviving lending and spending. The strong monetary weapons used by the bank, along with the influential government assistance, gave an impetus to the economy and succeeded in moderating the pace of contraction across all sectors of the economy.
Policy Makers at the ECB will meet today, to announce the interest rate for September. The European central bank (ECB) is expected to keep key interest rates unchanged at its historical low of 1%; for the fourth consecutive month. The rate was lowered by 3.25% since October 2008, to give reinvigorate the economy after the massive degradation that hit all sectors on the back of the economic recession, which adversely impacted global economies last year.
The ECB previously mentioned that the recovery may face impediments; perhaps the most challenging is the rising unemployment curtailing spending, and therefore putting a downside pressure on prices. The general price level slipped the most, after energy costs slumped and unemployment spiked to its highest since 10 years. In July, prices in the euro area fell to -0.7%, recording the worst drop since records began in 1996. The inflation rate witnessed a massive decline in crude oil prices in 2008; when prices fell to their lowest of $33 a barrel, from its highest record above $147 a barrel.
The ECB expects the inflation rate to be negative on the short term; whereas on the medium and long term, they expect the rate to stabilize and remain close to the target. They also anticipate economic activities to remain weak in the coming period, despite the progress witnessed in the second quarter, after the efforts done by the ECB to jolt the economy out of recession.
Trichet and his economic team expect the inflation to remain between 0.1% and 0.5% in 2009. On the other hand, the European Commission predicts a reading under 0.5% for the euro region by the end of the current year, as a result of the ongoing contraction in the economies of 16-nation economy, where firms cut their production to respond to the dwindling domestic and global demand.
Published on Thu, Sep 3 2009, 07:00 GMT
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