Eurozone jobless rate rises as inflation drops

Bloomberg

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European unemployment increased more than economists expected in January and inflation slowed, adding to arguments for the European Central Bank, or ECB, to cut interest rates more to revive the economy.

The jobless rate in the euro region rose to 8.2 percent, the highest in more than two years, from a revised 8.1 percent in December, the European Union statistics office said Friday. The January rate exceeded the 8.1 percent median estimate in a Bloomberg survey of 25 economists. Inflation eased to 1.1 percent last month from 1.6 percent in December, led by declining energy prices.

Europe faces the worst recession since the Second World War this year as the global financial crisis curtails exports and investment, forcing companies to cut production and jobs. ECB policy makers have signaled the bank will reduce interest rates to a record low at their meeting next week to spur lending and boost the economy.

"It’s evident jobless rates will continue to rise, next year in the direction of 10 percent," said Martin van Vliet, an economist at ING Groep in Amsterdam. "Inflation is no longer a danger anymore."

With companies and consumers cutting back, the euro region’s manufacturing and service industries unexpectedly contracted at a record pace in February, according to a survey of purchasing managers by Markit Economics. Confidence in the economic outlook is at an all-time low, data Thursday showed.

"Unemployment is a clear concern right now in many parts of the euro area," ECB President Jean-Claude Trichet said Thursday in Dublin. Labor-market reforms are "very important to counteract the economic downturn and limit its negative impact on employment."

BASF, the world’s largest chemical company, said it will accelerate plant closures and eliminate at least 1,500 jobs after its first quarterly loss in seven years. The German company expects 2009 sales and profits to fall.

Punch International, a Belgian maker of gearboxes and other equipment, Friday said it plans to eliminate 150 positions at BBS International in Schiltach, Germany, after sales declined 40 percent. Sulzer, the world’s second-biggest maker of pumps, is cutting jobs and shortening hours at its textile, coatings and automotive units.



Central Bank under pressure

The Frankfurt-based central bank is under pressure to follow the Bank of England and the U.S. Federal Reserve in outlining additional measures to combat the deepening slump. The ECB, which has lowered its benchmark rate by more than half since early October to 2 percent, is expected to cut another 50 basis points off on March 5, according to a Bloomberg survey of economists.

The euro-area economy shrank the most in 13 years in the fourth quarter as companies scaled back output and shed jobs. The International Monetary Fund predicts a 2 percent contraction this year and IMF Managing Director Dominique Strauss-Kahn on Feb. 19 said that forecast may need to be lowered.

With the recession deepening and oil prices down more than 70 percent from their all-time high in July, euro-area inflation held below the ECB’s 2 percent ceiling for a second month in January, giving the central bank more scope to reduce borrowing costs. Energy prices declined 5.3 percent from a year earlier. Last month’s 1.1 percent inflation rate, the lowest since July 1999, matched a Jan. 30 estimate.

ECB Governing Council member Axel Weber said in a newspaper interview that while the central bank probably will cut borrowing costs again, 1 percent is probably the "lowest limit" for the benchmark rate.