The Wall Street Journal-20080116-Europe-s Economies Show Signs of Slowing
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Europe's Economies Show Signs of Slowing
LONDON -- Europe's economies show signs of slowing significantly even as inflation rates rise, introducing the word 'stagflation' into the scenarios that some economists are sketching out for 2008.
Across Europe, fresh data yesterday showed inflation rising in December on the heels of softening economic growth.
"The outlook currently facing many central bankers has a stagflation feel about it," said John Shepperd, an economist at Dresdner Kleinwort in London. "The problem is that while Chinese and Asian growth cushions the impact of the U.S.-led economic slowdown, it is not likely to prevent it. Hence the coincidence of slow growth and yet still high commodity prices."
The term stagflation is used to describe the policy-challenging combination of a stagnating economy at a time of rising inflation. Although the scenario is unlikely to be as severe as the oil-price induced inflation shock of the 1970s, economists contend it could still be uncomfortable.
Higher oil and food prices pushed December consumer prices higher in France, Spain and Italy, with the French measure accelerating at its fastest annual rate in more than 3 1/2 years, data released by national statistics office Insee showed. A combined euro-zone inflation reading for December is due out later this week.
High inflation rates look set to continue in 2008, with the European Central Bank's staff projections predicting the euro zone's inflation rate will spend the year well above its 2% target, at around 2.5%. The ECB now sees a series of hefty wage demands, in part to offset inflation, as the next big inflation threat. Its primary weapon, higher interest rates, would threaten to choke off a euro-zone economy already showing signs of slowing at the end of 2007.
An official from the German statistical office, Destatis, yesterday said gross-domestic-product growth in Europe's largest economy is expected to slow sharply in the fourth quarter from the previous period, to 0.25%, in adjusted terms, from 0.7% quarter-on-quarter growth in the third quarter. German government officials say the country's export-driven growth is likely to slow to around 1.8% this year after growing 2.5% in 2007.
Several risk factors are clouding Germany's growth outlook, Chancellor Angela Merkel warned yesterday. "We are and will be working in a more difficult world economic context," Mrs. Merkel said, highlighting the U.S. subprime crisis, higher energy prices and "incredible pressure on food prices" as the main concerns.
But Mrs. Merkel shrugged off the euro's rise, calling it "a sign of the strength of Europe."
