Eurozone Inflation Slows Further, Manufacturing Nears Stagnation

Eurozone consumer price inflation slowed for a third month in January to its lowest level in nine months on weaker energy price growth, while core inflation accelerated as services costs grew at a faster rate.

Elsewhere, the latest survey data from IHS Markit showed that the Eurozone manufacturing sector moved closer to stagnation in January amid a modest gain in output and a sharp fall in new orders.

The consumer price index rose 1.4 percent year-on-year in January after a 1.6 percent increase in December, preliminary data from Eurostat showed on Friday. The latest inflation figure was in line with economists’ expectations.

Inflation was the lowest since April last year, when it was 1.3 percent.

Core inflation, which excludes prices of energy food, alcohol and tobacco, accelerated to 1.1 percent in January from 1 percent in December. Economists had expected the rate to remain steady.

The European Central Bank targets inflation “below, but close to 2 percent.”

In January, the energy component registered the biggest annual increase of 2.6 percent, which was slower than December’s 5.4 percent rise.

This was followed by food, alcohol & tobacco, up 1.8 percent, same as in December.

Prices of services rose 1.6 percent, which was faster than the 1.3 percent gain in each of the previous two months. Non-energy industrial goods prices edged up 0.3 percent, slightly slower than the 0.4 percent gain in each of the previous three months.

In December, the ECB Staff predicted 1.6 percent inflation for this year, 1.7 percent for next and 1.8 percent for 2021.

The downgrade to inflation projections likely reflected to a large extent downward revisions to the expected oil price as well as to expectations for underlying inflation, the ECB said.

Professional forecasters trimmed their core inflation forecast for this year to 1.3 percent from 1.4 percent, the latest survey from the ECB showed last week.

With the ECB assessing that the risks to Eurozone growth outlook has moved to the downside, business conditions are set to remain sluggish over the coming months. The dovish remark has almost wiped out any hope of an interest rate hike this year.

The final Eurozone manufacturing Purchasing Managers’ Index dropped to 50.5, in line with the flash estimate, from 51.4 in December. A PMI reading above 50 suggests growth in the factory sector.

The manufacturing PMI has now fallen for six consecutive months to reach its lowest level since November 2014, IHS Markit said.

Individual surveys showed that the factory PMI slid to a 50-month low of 49.7 in Germany, worse than the flash reading of 49.9. Italy’s measure was the lowest in 68 months at 47.8.

Meanwhile, the manufacturing PMI climbed to a three-month high of 51.2 in France, in line with the flash reading, and rose to its highest level in two months of 52.4 in Spain.

The gauge fell, but remained in expansion territory, in the Netherlands, Greece, Austria and Ireland.

“The January PMI adds to the likelihood that the manufacturing sector is in recession and will act as a drag on the economy in the first quarter,” IHS Markit Chief Business Economist Chris Williamson said.

“There appears to be a more deep-rooted malaise setting in, which reflects widespread concerns about the destabilising effect of political uncertainty and the damage to exports from rising trade protectionism,” the economist added.

Preliminary data released on Thursday showed that the euro area economy expanded at the weakest pace in four years in the final three months of 2018.

Gross domestic product grew 0.2 percent from the third quarter, when the economy expanded at the same pace.

Among, the big four of Eurozone, Italy emerged the sick one, falling into a technical recession in the fourth quarter. Spain logged faster growth, while the pace of expansion was stable in France despite the “yellow-vests” protests. Germany likely avoided a technical recession in the fourth quarter, the economy ministry has said.

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