Europe Unemployment at Two-Year High; Inflation Slows

By Jurjen van de Pol

Feb. 27 (Bloomberg) -- European unemployment rose more than economists expected in January and inflation slowed, adding to arguments for the European Central Bank to cut interest rates more to revive the economy.

The jobless rate in the euro region increased to 8.2 percent, the highest in more than two years, from 8.1 percent in December, the European Union statistics office in Luxembourg said today. The January rate exceeded the 8.1 percent median estimate in a Bloomberg survey of 25 economists. Inflation eased to 1.1 percent last month, the lowest since July 1999.

Europe faces the worst recession since the Second World War this year as the global financial crisis curtails exports and investment, forcing companies to cut production and jobs. ECB policy makers have signaled the bank will reduce interest rates to a record low at their meeting next week to spur lending and boost the economy.

“It’s evident jobless rates will continue to rise, next year in the direction of 10 percent,” said Martin van Vliet, an economist at ING Groep NV in Amsterdam. “Inflation is no longer a danger anymore.”

With companies and consumers cutting back, the euro region’s manufacturing and service industries unexpectedly contracted at a record pace in February, according to a survey of purchasing managers by Markit Economics. Confidence in the economic outlook is at an all-time low, data yesterday showed.

‘Clear Concern’

“Unemployment is a clear concern right now in many parts of the euro area,” ECB President Jean-Claude Trichet said yesterday in Dublin. Labor-market “reforms are very important to counteract the economic downturn and limit its negative impact on employment.”

BASF SE, the world’s largest chemical company, this week said it will accelerate plant closures and eliminate at least 1,500 jobs after deteriorating markets led to its first quarterly loss in seven years. The Ludwigshafen, Germany-based company expects 2009 sales and operating profit to decline.

Punch International NV, a Belgian maker of gearboxes and other equipment, today said it will eliminate 150 jobs at BBS International GmbH in Schiltach, Germany, after sales declined 40 percent. Sulzer AG, the world’s second-biggest maker of pumps, is cutting jobs and shortening hours at its textile, coatings and automotive units.

Under Pressure

The Frankfurt-based central bank is under pressure to follow the Bank of England and the U.S. Federal Reserve in outlining additional measures to combat the deepening slump. The ECB, which has lowered its benchmark rate by more than half since early October to 2 percent, matching a record low, is expected to cut another 50 basis points off on March 5, according to a Bloomberg survey of economists.

“There is a cast-iron case for the ECB to cut interest rates next Thursday,” said Howard Archer, chief European economist at IHS Global Insight in London. “The ECB is under increasing pressure to come up with additional measures to try and boost economic activity.”

ECB Governing Council member Miguel Angel Fernandez Ordonez this week said policy makers were “obliged” to study the potential use of unconventional tools and a review of possible steps was “progressing.” ECB colleague Ewald Nowotny said on Feb. 17 that a discussion on unconventional measures was “going on in the ECB and we have to see how things develop.”

The euro was off its session lows against the dollar following the unemployment and inflation reports. The European currency was down 0.5 percent at $1.2683 at 11:03 a.m. in London, after trading as low as $1.2630 earlier.

Global Slump

The euro-area economy shrank the most in 13 years in the fourth quarter as companies scaled back output and shed jobs. The International Monetary Fund predicts a 2 percent contraction this year and IMF Managing Director Dominique Strauss-Kahn on Feb. 19 said that forecast may need to be lowered as the global slump worsens.

With the recession deepening and oil prices down more than 70 percent from their all-time high in July, euro-area inflation held below the ECB’s 2 percent ceiling for a second month in January, giving the central bank more scope to reduce borrowing costs. Energy prices declined 5.3 percent from a year earlier.

ECB Governing Council member Axel Weber said in a newspaper interview this week that while the central bank probably will cut borrowing costs again, 1 percent is probably the “lowest limit” for the benchmark rate. Investors expect the ECB to reduce the key rate to 1.25 percent next week, Eonia forward contracts show.

To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net