European March Inflation Slows to Lowest on Record

By Simone Meier

March 31 (Bloomberg) -- Europe’s inflation rate dropped more than economists expected to the lowest on record in March as the economic slump intensified across the region, adding to concerns that deflationary pressures are emerging.

Inflation in the euro area slowed to 0.6 percent from 1.2 percent in February, the European Union statistics office in Luxembourg said today. The March rate is the lowest since the data were first compiled in 1996 and below the 0.7 percent forecast by economists, according to the median of 35 estimates in a Bloomberg News survey.

Inflation is subsiding as Europe’s economy grapples with the worst recession since World War II and companies cut spending and jobs to weather the global slump. Spanish consumer prices declined from a year earlier for the first time ever in March, data showed yesterday. The European Central Bank has signaled it is ready to reduce its benchmark rate further from a record low to help revive growth.

“We don’t have an inflation threat at the moment and that’s why the ECB has to focus on deflation,” said Sylvain Broyer, an economist at Natixis in Frankfurt. “We’ll probably reach the low point in inflation at just below zero around mid- year.”

Consumer-price expectations fell for a fifth month in March, reaching the lowest level since the indicator was first published in 1990, the European Commission said in a report yesterday. Manufacturers’ selling-price expectations also dropped to a record low.

‘Grim Outlook’

“The grim outlook for economic activity in the euro area and widespread evidence of falling inflation call for exhausting the remaining scope for further cuts,” the Organization for Economic Cooperation and Development said in a report today. “With the bleak economic outlook, quantitative easing should be used to support demand.”

The euro-area economy will probably shrink around 2.7 percent this year and stagnate in 2010, the ECB said earlier this month. Inflation may average about 0.4 percent this year. The central bank aims to keep annual price growth just below 2 percent.

“We expect demand to remain very weak throughout 2009 before gradually recovering in the course of 2010,” ECB President Jean-Claude Trichet told European lawmakers in Brussels yesterday. He said 2009 will be “a very, very difficult year, where you have to accept negative growth all across the year.”

Jobless Rate

With employers firing workers to cope with declining demand, Europe’s jobless rate probably rose to 8.3 percent in February from 8.2 percent in the previous month, according to a Bloomberg survey. That would be the highest since June 2006. The statistics office will release the unemployment report tomorrow.

Munich-based Siemens AG, Europe’s largest engineering company, said on March 27 that it is cutting personnel costs and will “significantly” increase the number of employees working shorter hours. Heidelberger Druckmaschinen AG, the world’s largest manufacturer of printing presses, plans to fire 5,000 workers, or about a quarter of the workforce.

A 50 percent drop in oil prices over the past year has helped push down inflation. European core inflation, excluding energy and food prices, is currently at 1.7 percent.

The “spectacular decline” in energy costs since mid-2008 has increased “the risk of deflation,” ECB council member Nout Wellink wrote in a March 26 report. Trichet yesterday said policy makers “don’t see that risk substantiated” at the moment. While inflation rates will “possibly temporarily” turn negative around mid-year, they are expected to accelerate again in the second half, Trichet said earlier this month.

‘Strong Evidence’

There is “already strong evidence that underlying inflationary pressures are diminishing rapidly,” said Howard Archer, chief European economist at IHS Global Insight in London. “We expect the ECB to bring interest rates down to a low of 0.5 percent by mid-year.”

Most economists in a Bloomberg survey expect the ECB to lower its benchmark rate to 1 percent when council members next meet on April 2 in Frankfurt. The central bank already has cut the key rate by 2.75 percentage points since early October.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net