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Unemployment drops, inflation jumps as Europe recovers

By on January 31, 2017

By David McHugh

FRANKFURT, Germany — Europe’s economic recovery is gathering speed, with growth up, inflation spiking sharply higher and unemployment at its lowest in nearly eight years, official figures showed Tuesday.

In perhaps the most striking development, European Union statistics agency Eurostat said inflation across the 19 countries that share the euro currency rose sharply in January — a move that will likely encourage critics who think it’s time for the European Central Bank to start withdrawing its stimulus programs.

Inflation jumped to an annual 1.8 percent in January, from 1.1 percent the month before. That’s the highest level since February 2013 and means inflation is arguably at the ECB’s goal of just below 2 percent.

Euro Sign in front of the European Central Bank in Frankfurt, Germany (iStock Photo)

Euro Sign in front of the European Central Bank in Frankfurt, Germany (iStock Photo)

Eurostat also said eurozone growth inched up by a quarterly rate of 0.5 percent in the fourth quarter of 2016 from the previous three-month period when growth was 0.4 percent.

The quarterly growth rate was the highest rate since the first quarter of 2016 when growth was also 0.5 percent. Overall, Eurostat said the eurozone economy expanded by 1.7 percent in 2016.

In another sign that the eurozone recovery is gaining momentum, Eurostat said unemployment across the region fell to 9.6 percent in December. That’s the lowest rate since May 2009, before a financial implosion in Greece kicked off a eurozone-wide debt crisis whose effects are still being felt.

The growth and unemployment figures will likely be a welcome boost to supporters of the European Union and the euro currency — especially in a year that’s likely to see electoral challenges from nationalist and populist anti-EU parties. Elections in France, the Netherlands, Germany and possibly Italy will give such forces a chance to test their support.

See also: European Central Bank adds half a trillion euros in stimulus

French presidential candidate Marine Le Pen of the Front National, for example, wants to leave the European Union and the euro. Polls suggest she could make it past the first round of voting in April but would lose in the May runoff. The British referendum vote to leave the European Union however caught many by surprise, as did the election of Donald Trump as president in the United States.

The inflation figure could present a headache however for Mario Draghi, head of the European Central Bank. It’s likely to embolden critics, particularly in Germany, who say it’s time for the bank to start withdrawing its extraordinary stimulus aimed at increasing inflation toward the bank’s goal.

The ECB has held its short-term benchmark interest rate at zero and is purchasing government and corporate bonds with newly printed money, a step that pumps fresh cash into the financial system and drives down longer-term borrowing rates. Critics say the zero-interest rate policy punishes savers, who get no return on conservative holdings such as bank deposits, and supports indebted governments with cheap borrowing costs.

Draghi however has shown no signs of readiness to start scaling back. He says the spike in inflation is caused by volatile oil prices, not by underlying price pressures in the economy such as wage increases passed on to consumers. That means the inflation spike could fade over coming months, as the effect of sharply lower oil prices a year ago is left behind. Core inflation, which excludes oil and food prices, remained stuck at 0.9 percent, about where it has been for months.

See also: As robots take jobs, Europeans mull free money for all

Europe’s recovery remains uneven. Germany, benefiting from strong exports and domestic demand, has an unemployment rate of only 3.9 percent, according to Eurostat.

Greece, which has struggled to get its finances under control despite three rounds of bailout loans from the other euro countries and the International Monetary Fund, remains mired in economic misery. The latest unemployment figures there, from October, showed 23.0 percent of the workforce out of a job.

Spain has showed a stronger recovery from a collapsed real estate boom, but the jobless rate remains at 18.4 percent despite a substantial drop in December from 20.7 percent.

Unemployment for young people leaving school is even worse in the lagging countries still feeling the effects of the debt crisis: 44.2 percent for under-25s in Greece, 42.9 percent in Spain and 40.1 percent in Italy.

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