The Eurozone, the world's largest economic bloc, moved closer to outright recession yesterday as industrial output plunged to a two-year low and Germany warned its economy could grind to a halt.
Industrial production in the 12-nation area fell 0.5 per cent between March and April, official figures showed. This took the annual rate of increase to 1.6 per cent, the lowest since July 1999. The fall was sharper than expected and came a day after it emerged that inflation had surged above 3 per cent for the first time in eight years.
The gloom was compounded by a warning from Werner Müller, Germany's economics minister, who said Europe's largest economy would see "zero per cent growth" in the second quarter of the year. His comments came a day after two leading research institutes cut their growth forecasts for Germany this year to as little as 1.3 per cent, and Bundesbank council member Hans Reckers said he could not rule out a recession.
The euro fell against the dollar as economists absorbed the wave of negative news. The single currency slipped to $0.8559 yesterday, from $0.8609 in New York late Monday.
"There is a lot of bad news on economic growth to come," said Ken Wattret, chief Euroland economist at BNP Paribas, who expects manufacturing to plunge into recession later this the year. But this is not just a story about a manufacturing recession, it is a story about recession for the economy overall," he said. He said he expects the European Central Bank to cut rates by a quarter-point, when it meets tomorrow.
However, the combination of weak growth and rising inflation will raise the spectre of "stagflation" in the markets and limits the room for the ECB to carry out drastic rate cuts. "The problem is that they ought to be cutting rates more quickly, and further, but then they can't do that because inflation won't allow that," said Mr Wattret.
ECB officials continued to stress that the bank was still focused on containing inflation threats, warning that high inflation, upcoming wage deals and the introduction of euro notes and coins next January remained of concern.
Klaus Liebscher, European Central Bank council member and Austrian central bank governor, said the ECB needed to remain very vigilant on inflation.
Fellow council member and Bundesbank President, Ernst Welteke, said the ECB must focus on maintaining price stability in an environment of "huge insecurity". Meanwhile, National Bank of Belgium Governor, Guy Quaden, also an ECB council member, said he was worried about the risks posed to inflation by price mark-ups associated with euro notes and coins. German Finance Minister, Hans Eichel, said high inflation was restricting the ECB's room to manoeuvre.