Euro Economy in 2008

News that inflation in the Eurozone increased to 3.2% did little to cheer market sentiment in Europe. This rise in inflation leaves Europe in a difficult situation with the prospect of lower growth and higher inflation.

In the US, the Fed has aggressively  cut interest rates from 5.25% to 3%. The Fed is hoping that the rate cuts will prevent a recession. However, the rise in Euro inflation means that the ECB has less scope for cutting to rates to help boost growth and support declining stock markets.

Inflation and Unemployment

Despite the rise in inflation, there is little sign of improving growth. Unemployment remains stubbornly high at  7.2 percent in December. According to Eurostat it has fallen a little in the past 12 months, down from 7.8 percent a year earlier. Consumer confidence in the Eurozone has also fallen a little to 101.7

However, despite the bad news on inflation and consumer confidence there are some reasons to be optimistic

The main cause of inflation is cost push factors in the food and energy sectors. These are partly due to micro economic supply constraints. If this inflation doesn’t spread to other sectors the inflation is likely to fall in the future, this may enable lower interest rates if the Euro economy does follow the US and slowdown.

At the moment the Euro economy is growing reasonably well; unlike the US, it doesn’t have a declining housing market. Although it is argued that many European countries (e.g. Ireland and UK) have overvalued house prices and are subject to a similar crash. (Global House Prices)

The Strength of the Euro

Another factor for the Euro economy is the strength of the Euro. With US interest rates falling, but ECB interest rates remaining high, this strength is likely to remain. Many European exporters are increasingly feeling the pinch from higher rates

Predictions for Euro Dollar 2008