Euro zone unemployment jumped to a 44-month high in March on the back of the worst European recession since World War Two, likely offsetting the beneficial effects on household demand of record low inflation.
The number out of work in the 16 countries using the euro rose 419,000 to 14.158 million — or 8.9 percent of the workforce, up from a revised 8.7 percent in February, data from European Union Statistics office Eurostat showed [ID:nBRQ007307]
Unemployment was last at 8.9 percent in July 2005 and economists expect it to reach 10 percent by the end of 2009 and 11 percent next year after German data for April showed a sixth straight month of layoffs.
German data showed the rate in Europe's biggest economy jumped to 8.3 percent in April from 7.6 percent in March.
"Given the general trends in recent months throughout the euro area, and based on the increase in German unemployment for April reported earlier today, the euro area unemployment rate now looks likely to have reached at least 9.1 percent in April," said James Ashley of Barclays Capital.
Joblessness in France rose to 8.8 percent from 8.6 percent while Spain saw the steepest jump — to 17.4 percent from 16.5 percent. In Ireland it rose to 10.6 percent from 10.0 percent.
Unemployment is rising fast as the euro zone struggles with the worst recession since the Second World War. The International Monetary Find expects the euro zone economy to contract 4.2 percent this year and 0.4 percent in 2010.
But even if 2010 will be better, the labour market will react with a delay, European Central Bank Executive Board member Lorenzo Bini Smaghi said in Florence.
"From the forecasts… we know that towards the start of next year the slowdown in the real economy will stabilise," Bini Smaghi said. "The impact on unemployment will continue."
HURT
The fast growth of the number out of work is likely to undermine confidence and cut the purchasing power of households even as record low inflation makes goods more affordable.
Thursday's Eurostat estimate as expected showed inflation unchanged from the record low of 0.6 percent reached in March.
"This does not mean that inflation is bottoming out but rather taking a breather before sliding further in the months to come. Below-zero inflation rates remain on the agenda for the summer," said Rainer Guntermann, economist at Commerzbank.
Economists said annual inflation was likely to fall to close to zero in May and reach a trough of -0.5 or -0.6 percent in July when the negative comparison with record high oil prices from a year before would be the most pronounced.
No monthly data or a breakdown of the April estimate were available, but economists said that upward pressure likely came from higher motor fuels and heating oil prices.
They said downward pressure came mostly from lower utility bills, particularly for natural gas, and lower food inflation.
The European Central Bank, which meets on interest rates on May 7, wants to keep inflation just below 2 percent and is expected to cut its refinancing rate by 25 bps to 1.0 percent.
With signals varied on whether rates can go lower after that, the bank is also expected to announce other ways of monetary policy easing, such as lengthening the maturity of its refinancing operations to 12 months from six or buying corporate or bank bonds, economists said.
"Today's data should have little impact on the outcome of the May 7 ECB meeting," said Marco Valli, economist at Unicredit.
"A 25 basis point cut in the refi rate and no change in the depo rate seems a done deal. A lengthening of the maturity of repo operations is also extremely likely, while asset purchase remains a very close call," he said.
