"compounding pressure on the European Central Bank (ECB) to reduce interest rates to the lowest ever next month."Germany, traditionally the economic engine of Europe, fared even worse with a contraction of 2.1% QOQ whereas Latvia nosedived 10.5% in a comparison with Q4/07.
Only Slovakia, Cyprus and Greece recorded marginal growth rates in comparison to Q3/07.
These news come on the heels of yesterday's negative industrial production figures for last December where only Lithuania escaped the negative trend. Industrial production declined by 2.6% MOM in the Eurozone and by 2.3% in the EU27. Slovakia's economy may be in for a hard landing, continuing its strongly accelerating decline with a negative figure of 12.4% (-7.7%) MOM.
A temporary ceasefire on the inflation front helps further the arguments for another interest rate cut in the Eurozone. According to Eurostat's flash estimate from January 30 Eurozone inflation declined to 1.1% (1.6%) in January.
Wage-Price Spiral Has Begun
But the broader trend signals newly emerging threats to price stability. The OECD said today in a press release that unit labour costs were on the rise in both the OECD and the Euro areas.
Unit labour costs in industry rose 1.0% quarter-on-quarter in the OECD area in the third quarter of 2008 (0.8% in second quarter) and resulting in a year-on-year growth rate of 2.6%. Italy maintained the highest growth rate in industry among the major seven economies with 2.1% growth in the third quarter, accumulating to 7.8% on an annual basis. German industry unit labour costs rose 0.5% in the third quarter of 2008 from 0.2% in the second quarter and giving a relatively modest 0.7% annual increase.Find a full table of unit labor costs here. At first sight it appears that second round effects, as higher wages are labeled by the ECB, may begin to hound the central bank in the near future.
Unit labour costs in market services in the major seven economies grew by 0.5% in the third quarter of 2008 (1.9% on an annual basis), reversing the decelerating trend of the two previous quarters. Higher growth rates in unit labour costs for market services were recorded in the OECD area and the Euro area in the third quarter of 2008 compared to the second quarter. In the Euro area they rose in the third quarter by 1.0% and 3.9%, on a quarterly and an annual basis respectively.
Summarizing an overall decline in economic activity in Europe it will be difficult for the ECB to maintain positive real rates in a world of zero interest rate policies. The ECB's main interest rate was lowered by 50 basis points to 2% on January 21. ECB governors are likely to surrender to political pressure at the next meeting in the hope to kickstart the European economy with another rate cut at their next meeting on March 5.
Monetary developments leave more room to maneuver for the ECB. According to the latest weekly financial statement the balance sheet of the ECB has shrunken to €1.893 trillion after hitting the €2 trillion mark late last year.