每日时讯英文阅读：Stagflation fears in eurozone rise

Stagflation fears in eurozone rise

By Javier Blas and Rebecca Bream in London

Tuesday, June 24, 2008

The eurozone yesterday slid closer to stagflation – low growth combined with rising inflation – as private sector output contracted this month for the first time in five years.

Weak economic data indicated soaring oil prices had hit growth in June, but not enough to stop the European Central Bank going ahead next week with a planned quarter percentage point rise to 4.25 per cent in its main interest rate.

The eurozone purchasing managers' index dropped from 51.1 in May to 49.5 in June, the first contraction in activity since July 2003. The risk of a recession in the 15-country region had increased, analysts said. That contrasted with the robust growth seen at the start of the year.

But the same survey also showed inflationary pressures mounting – especially in the service sector, where prices rose at the fastest rate for more than seven years. That will alarm the ECB, which saw the annual eurozone inflation rate leap to 3.7 per cent in May, the highest for 16 years, and is braced for a rise as high as 4 per cent in coming months.

“The ECB hiking [interest rates] in July would be consistent with a stagflationary feel,” said Michael Hume at Lehman Brothers.

The ECB is also concerned about rising wage bills. It aims to keep annual inflation “below but close” to 2 per cent. So far it has not given any signals about interest rate changes beyond July. But the purchasing managers' indices – seen as good guides to economic trends – will weaken the hand of those at the central bank arguing for further monetary policy tightening.

The prospect of higher official eurozone borrowing costs could already have hit sentiment, Holger Schmieding at Bank of America said. “The ECB could well end up getting much of the blame for the sharp economic slowdown, which is now in the pipeline,” he said.

The purchasing managers' indices, compiled by Markit and the Royal Bank of Scotland, showed a slowdown also under way in Germany – which has powered eurozone growth recently – but not yet a dramatic decline. The German index was at a three-month low of 53.7.