LONDON (Standard & Poor’s) –Recent inflation figures indicate a marked contrast between the U.K. and Eurozone, Standard & Poor’s said in its latest forecast report for the region. Titled “European Economic Forecast: Is Inflation On Its Way Back?,” the report finds a degree of disparity between the outlook for these two markets and argues that an immediate interest rate hike may not be warranted in the Eurozone.
“The latest inflation figures for the U.K. show a sharp acceleration across the board,” said Jean-Michel Six, Standard & Poor’s chief economist for Europe. “CPI inflation in the year to March reached 3.1%, from 2.8% in February. This is the fastest rate in a decade and well above the 2% target of the Bank of England’s Monetary Policy Committee. The retail price index excluding mortgage interest payments, which remains a key peg for a number of wage settlements, also surged to 3.9%. And CPI inflation excluding energy–a proxy for the core inflation concept used in other countries–was up as well.
“By contrast, headline CPI inflation in the Eurozone was 1.9% in the 12 months to March, up from 1.8% in February but still below the European Central Bank’s target of 2%. Core inflation also remained stable at 1.9%,” he added.
Yet with liquidities in the Eurozone continuing to grow at a rapid rate, and fears that a buoyant economy will trigger wage claims, the Bank is keen to manage inflationary expectations and will likely impose a rate hike in the near term.
Standard & Poor’s believes inflation in the Eurozone to be a distant threat. Productivity growth, for instance, has accelerated, keeping unit labor costs in check. Furthermore, the share of employee compensation in nominal GDP has been declining continually since the end of 1999, to 47.2% at the end of last year from 49.5%.
More fundamentally, we are witnessing a geographic shift in Eurozone growth. In past years, growth primarily originated in the southern part of the zone. This was particularly true of Spain, where the construction sector has been a major source of expansion. But growth also originated in France, thanks to resilient consumer demand, and in Italy. The recent slowdown in housing markets across the region, coupled with the persistently slow growth in real incomes, will result in lower GDP growth in those countries.
Meanwhile, the ” German model,” in which higher capital formation and exports drive employment and domestic demand, is gaining ground not only in Germany, but also in Austria and the Netherlands. A core feature of that model is (labor) cost containment, allowing foreign competitiveness to be high. So unless the “rapport de force” between employers and employees changes dramatically in the near term, consumer price inflation should remain benign in those faster-growing economies. It is also expected to drop in Spain on the back of decelerating domestic demand and remain low in France and Italy.
