German December Inflation Slows on Falling Oil Prices
The inflation rate in Germany, Europe’s largest economy, dropped to the lowest level in more than two years in December after the cost of oil plunged.
The inflation rate declined to 1.1 percent from 1.4 percent in November, the Federal statistics Office said in Wiesbaden today. That’s the lowest level since October 2006. Economists expected German inflation to slow to 1.2 percent using a harmonized European Union method, according to the median of 19 forecasts in a Bloomberg News survey. From a month earlier, prices rose 0.4 percent.
The cost of crude oil has dropped more than 70 percent from a July peak of $147 a barrel, alleviating price pressure and making it easier for the European Central Bank to cut interest rates. The Frankfurt-based bank has lowered its benchmark by 175 basis points to 2.5 percent since early October after the global financial crisis pushed up lending costs and the euro area fell into its first recession in 15 years.
“Inflation rates will continue to decline in coming months, but we don’t expect a deflation even if rates may turn negative temporarily,” said Arnd Schaefer, an economist at WestLB Equity Markets in Dusseldorf. “The ECB will quickly reduce its benchmark and reach the trough in interest rates at 1.5 percent in the second quarter.”
Writedowns, Losses
The worst U.S. housing slump since the Great Depression has pushed up the cost of credit globally and caused stock markets to tumble. The world’s biggest financial companies have posted about $1 trillion in writedowns and credit losses since the start of last year after the subprime mortgage market collapsed.
European retailers reported sales, jobs and profit margins all contracted this month as the deepening recession curbed consumer confidence and spending, the Bloomberg purchasing managers’ index showed today payday cash advance. Tighter credit standards at banks meant private sector lending slowed for an 11th month in November, rising 7.1 percent after a 7.8 percent increase in October, the ECB said in a separate report.
The deteriorations mean the 15-nation euro area will mark a decade of the single currency on Jan. 1 facing a deepening recession, leaving investors betting the ECB will reduce interest rates as early as next month.
Still, ECB policy makers have indicated in recent days that they’re reluctant to decrease rates much further. ECB President Jean-Claude Trichet signaled on Dec. 15 that the bank may pause in reducing borrowing costs at the next meeting on Jan. 15.
Scaled Back
In Germany, companies have scaled back output as slower growth erodes demand for goods made in Europe’s largest economy. Business sentiment dropped to the lowest level in more than 25 years in December.
German manufacturing orders slumped 6.1 percent in October from the previous month as European demand for plant and machinery collapsed and industrial production of the world’s biggest exporter dropped 2.1 percent.
With the manufacturing sector most hit by the crisis, the Kiel-based IfW last week predicted the German economy to shrink 2.7 percent next year as corporate investments and exports slump. That’s the most pessimistic prediction by a leading research institute.
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