Inflation in euro zone close to lowest rate since 1999

INFLATION IN Europe remained close to its lowest rate since 1999 in February, setting the scene for a historic cut in euro zone…

INFLATION IN Europe remained close to its lowest rate since 1999 in February, setting the scene for a historic cut in euro zone interest rates on Thursday.

As the global financial crisis continued to undermine consumer confidence and curtail spending, consumer prices in the euro zone rose at the subdued annual rate of 1.2 per cent in February, only slightly higher than the 1.1. per cent rise recorded in January, according to an estimate published yesterday by the European Union statistics office.

The low inflation rate increases pressure on the European Central Bank (ECB) to cut euro zone interest rates when its governing council meets in Frankfurt this week.

The ECB is widely expected to lower its key lending rate by half a percentage point to 1.5 per cent, the lowest rate in its history, in order to bolster the economy.

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Manufacturing activity in Europe shrank at a record pace in February as export orders collapsed and companies scaled back production.

Meanwhile, economists at Davy Research slashed its economic forecast for gross national product (GNP) in Ireland for this year and next.

Blaming a virtual collapse in global trade since its last projections, Davy said real GNP would shrink for a third straight year in 2010. It forecast a decline of 4.4 per cent in volume, a significant deterioration on its previous forecast of a 0.5 per cent decline.

It also substantially downgraded its forecast for 2009, predicting a 7 per cent fall in GNP compared to an earlier forecast of minus 4.1 per cent.

Davy’s forecast is one of the grimmest prognoses for the economy yet. Last month Goodbody Stockbrokers said the economy would contract by 6 per cent this year.

According to Davy, the economy may end up shrinking 16 per cent over the 2008-2010 period, with consumer spending and building investment falling further next year and householders increasing the levels of savings they put aside as a precautionary measure.

Davy economist Rossa White said the country’s main task was to stop the rise in the general Government deficit and that “austere measures” were required immediately.

“That will require public buy-in across all sectors, with severe cuts to current public spending, especially in payroll, and a much higher tax burden from next year onwards.”

Mr White said the retrenchment in consumer spending would intensify this year, compounded by the spike in unemployment, softening wages and an increased tax burden per worker.

“Even the sharp drop in interest rates and lower prices elsewhere as the year progresses will not stop real consumer spending falling by 5 per cent,” he said, predicting a similar decline in spending in 2010.

However the biggest change to Davy’s forecasts related to exports.

Certain sectors that saw strong export growth in recent years would undergo a “dramatic reversal” due to the ongoing upheaval in financial markets.

Laura Slattery

Laura Slattery

Laura Slattery is an Irish Times journalist writing about media, advertising and other business topics