Europe is slowly recovering from the recent recessions and is entering an expansion since GDP is rising and unemployment falling. The only issue is extremely low inflation rate. Let’s take a closer look at the main macroeconomic indicators and their recent performance.
Inflation remains extremely low in the euro area. According to the first Eurostat estimate average annual inflation rate is 0.2% in July. This represents 0.1% increase compared to June, when inflation was 0.1%. Inflation rate increased mainly due to the increase in prices of food, alcohol, tobacco. Their prices rose in July 1.4% annually. Next major component of inflation were services increasing 1.2% followed by non-industrial goods, their prices increased 0.4%. On the other hand, energy prices fell 6.6%. In the figure below we can see the history of inflation and its components during the recent past.
According to Eurostat report issued today, the euro area seasonally-adjusted unemployment rate was 10.1% in June 2016, stable compared to May 2016 and down from 11.0% in June 2015. This unemployment rate is the lowest rate since July 2011. The EU unemployment rate was 8.6% in June 2016, stable compared to May 2016 and down from 9.5% in June 2015. In the figure below we can see how unemployment rate differs among member countries.
Seasonally adjusted GDP rose by 0.3% in the euro area and by 0.4% in the EU during the second quarter of 2016, compared with the previous quarter, according to a preliminary estimate published by Eurostat. On the figure below, we can see recent history of GDP growth rates in Europe.
As mention above, the biggest challenge for ECB remains extremely low inflation. Inflation rates around 0 are concerning, since ECB is targeting inflation rate to be close to 2%. According to the Peter Praet, who is a member of the Executive Board of the ECB, the prolonged period of low inflation we are in today has increased the risks that inflation misses might become persistent, which would be deeply damaging for the economy. ECB needs to tackle extremely low inflation but conventional monetary policy tools are not sufficient. Therefore ECB is considering more and more unorthodox instruments.