May 16 (Bloomberg) -- European inflation slowed last month and exports dropped in March as the euro region’s spreading fiscal crisis undermined the economy and consumer demand.
The inflation rate in the 17-nation euro area fell to 2.6 percent from 2.7 percent in March, the European Union’s statistics office in Luxembourg said today. That’s in line with an initial estimate published on April 30. Euro-region exports fell 0.9 percent in March from the previous month, when they rose 2.2 percent, it said in a separate statement.
The euro-area economy is showing few signs of recovery after stalling in the first quarter as budget cuts and increasing unemployment undermine consumer demand and leave companies with little room to raise prices. The European Central Bank on May 3 kept its benchmark interest rate at 1 percent, with President Mario Draghi calling risks to the inflation outlook “broadly balanced.”
“If the ECB acted, it wouldn’t be because of prices but because of the economic development,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “We expect euro-region inflation to normalize in 2013. The economy will probably gradually recover in the second half of this year and that means the ECB has room to keep interest rates on hold.”
The euro pared losses after the data were released, trading at $1.2720 at 11:10 a.m. in Brussels, down less than 0.1 percent.
Euro-area core inflation, which excludes volatile costs such as energy, held at 1.6 percent in April, today’s report showed. Consumer prices rose 0.5 percent from March.
The ECB said on May 10 that professional forecasters predict euro-region inflation will average 2.3 percent this year and 1.8 percent in 2013. That’s up from 1.9 percent and 1.7 percent three months ago. The economy may shrink 0.2 percent this year instead of a previously projected 0.1 percent, the quarterly survey showed. The Frankfurt-based central bank aims to keep inflation just below 2 percent.
Retreating energy costs are leaving the ECB with more room to focus on ways to bolster the economy. Draghi said at the May 3 rate meeting that while there was some “stabilizing economic activity at low levels” in the first quarter, the “most recent survey indicators show uncertainty prevailing.”
‘Challenging Market Conditions’
Euro-region services and manufacturing industries contracted for an eighth straight month in April and economic confidence fell to the lowest since December. Euro-area unemployment rose to 10.9 percent in March, the highest in 15 years, and Italian households grew more pessimistic last month.
Volkswagen AG’s Audi brand on May 10 forecast 2012 profit will hold steady as faltering European markets offset higher worldwide deliveries. Chief Financial Officer Axel Strotbek said the company is faced with “particularly challenging market conditions” in western Europe.
Still, Germany’s export-driven economy has helped soften the region’s economic slump. Europe’s largest economy expanded 0.5 percent in the first quarter from the previous three months, more than economists had forecast, boosted by global demand while domestic consumption also increased.
Bayerische Motoren Werke AG, the world’s biggest maker of luxury vehicles, on May 3 reported first-quarter profit that beat analyst estimates. The Munich-based company will start production at a second plant in China this month.
Euro-area imports dropped 1.1 percent from February, when they rose 3.2 percent, today’s report showed. The trade surplus widened to 4.3 billion euros ($5.5 billion) from 4 billion euros. Shipments to the U.S. rose 14 percent in the two months through February, while exports to the U.K. advanced 10 percent, the statistics office said.
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