Eurozone unemployment highest for more than two years

More than a quarter of a million jobs were lost in the eurozone last month, taking the unemployment rate up to 8.2 per cent, its highest level in more than two years.

Meanwhile, inflation is on the slide, raising the expectation of further interest rate cuts from the European Central Bank (ECB) next month.

In the 10th consecutive month of rising unemployment, a total of 13 million people in the 16-state euro bloc were out of work in January, 256,000 more than in December, according to official figures published yesterday. A year ago, the rate was 7.3 per cent.

The Netherlands and Austria are the best performers, with unemployment of just 2.8 and 4 per cent respectively. Spain is the worst hit, with a massive 14.8 per cent of the population out of work, ahead of Latvia with 12.3 per cent.

The figures for the EU as a whole – including the 11 countries with their own currencies – are not much better. Unemployment rose by a similar proportion to 7.6 per cent in January, as 386,000 jobs were lost.

Howard Archer, the chief economist at IHS Global Insight, predicts that Eurozone unemployment levels could rise as high as 10 per cent next year.

"The recession that started in the second half of last year has deepened markedly and is increasingly taking its toll on the labour market," he said.

"But unemployment tends to be a lagging indicator, so we are still in the fairly early stages. We expect the European economy to contract by around 2.5 per cent this year, and remain flat in 2010, so job losses will continue to rise."

Alongside rising redundancies, inflation dropped more precipitously in January than ever before, falling to its lowest level since July 1999.

Having ballooned to a high of 4 per cent last summer, boosted by sky-high commodity prices, eurozone inflation fell from 1.6 per cent to 1.1 per cent last month, way below the ECB's target zone of just less than 2 per cent.

The ECB has already instituted a series of interest rate cuts – taking the base rate down to 2 per cent – and yesterday's figures will increase the pressure for further reductions. But lower interest rates may not be enough on their own.

"A reduction will help, but the problem is not only the cost of capital but also its availability," Mr Archer said. "Credit conditions are still tightening, so the ECB will have to start looking at other measures to supplement interest rate cuts."