European inflation remains in negative territory, the European statistics authority said in a statement yesterday. Eurozone annual inflation is expected to be -0.3 percent in February 2015, a slight increase from -0.6 percent in January, according to a flash estimate from Eurostat, the statistical office of the European Union. Inflation also declined by 0.2 percent in December, Eurostat said.
With inflation in negative territory for over two months in the eurozone, the lack of economic growth is showing, economists said. Exports dropped 1.1 percent in January, according to EuroStat. "Headline inflation is low and the ECB (European Central Bank) expects it to only gradually head back toward target levels. This creates a serious risk that inflation expectations will head down, too," commented Christian Schulz, an economist with Berenberg Bank in Hamburg, Germany, in a note published yesterday.
In other words, it will take time for inflation to return to target levels, thus augmenting the risks for the latter to decrease during this period. Schulz pointed to another danger sign for deflation: low credit demand. "In a normal recovery, an economic upswing would be closely followed by firms and households beginning to borrow from banks to invest and spend. There is no sign of that yet. Bank loans to households were down by 2.3 percent year-on-year in December."
Weak investment is another challenge for the eurozone. "The stock exchanges have risen, but it's a bubble," said Paris-based economist Phillippe Dessertine in a note on Monday. "Businesses are still cautious in the wake of the Greek debt debacle and exchange rate volatility. This is (a) key missing element for growth."
A recent report by the International Monetary Fund (IMF) indicated excessive corporate debt in Europe as another drag on business investment. "The relative importance of different factors varies across countries. Financial constraints (from the European Commission consumer and business survey) have limited investment, particularly in stressed countries. High corporate sector leverage and uncertainty are additional impediments to investment in Italy, Spain, and to a lesser extent in Portugal and France," the IMF report said.