Europe’s Recovery Diverges as Italy Jobless at Record

Europe’s two-speed economy was underscored in data today showing strengthening in the German labor market just as Italy’s jobless rate reached a record.

Overall euro-area unemployment was at 11.9 percent in February, lower than the 12 percent median forecast of 32 economists in a Bloomberg News survey. In Italy it rose to 13 percent, while in Germany the locally defined jobless rate for March stayed at the lowest in at least two decades.

The divergence between the region’s third-biggest and largest economies highlights the challenge faced by the European Central Bank’s Governing Council as it meets this week to assess the need for stimulus and gauge the risk of deflation at a time when consumer prices are increasing at about a quarter of the pace that officials would like.

“While we might be seeing a recovery more generally in the euro area, the pace of that expansion is unlikely to be sufficiently strong to make a serious dent on the unemployment picture,” said Timo del Carpio, an economist at RBC Capital Markets in London. “German growth is likely to outpace the euro-area average over the year as a whole, but that doesn’t mean that it will be the sole engine of growth for the euro area.”

The Frankfurt-based central bank lowered its benchmark interest rate to a record low of 0.25 percent in November and held it at that level since then. Only three of 57 economists in a Bloomberg survey expect the ECB to cut it when policy makers meet on April 3. The rest predict the rate to remain unchanged.

Inflation Contagion

The European Union’s statistics office in Luxembourg, which today revised lower the eurozone jobless rate for January and the prior two months, said yesterday that the region’s inflation rate slowed to 0.5 percent in March, the lowest level in over four years. That compares with the ECB’s goal of just below 2 percent.

“The unemployment rate will remain broadly stable this year as the rise in employment is too modest to trigger a significant decline,” said Apolline Menut, a London-based analyst at Barclays Plc. “More worrying is the contagion from short-dated to more medium-term inflation expectations as further downward moves could push an already late ECB into loosening monetary policy further.”

European stocks advanced today, with the Stoxx Europe 600 Index gaining 0.5 percent to 336 at 2:01 p.m. in Brussels. The euro appreciated against the dollar, rising 0.2 percent to $1.3791.

ETF Inflows

International investors are returning to the euro, including to nations that received bailouts in the depths of the crisis. U.S. exchange-traded funds show net inflows of $634 million into Spain this year, marking an increase of 71 percent, according to data compiled by Bloomberg. Flows into Greece have increased 77 percent to $102 million.

Separate data today showed euro-area manufacturing activity stayed close to the highest since 2011, confirming a March 24 estimate. Last week, a report showed that economic confidence increased more than analysts forecast in March as an index of executive and consumer sentiment rose to the highest since July 2011.

In Germany, the number of people out of work dropped by a seasonally-adjusted 12,000 to 2.9 million in March, after falling a revised 15,000 the previous month. Economists forecast a decline of 10,000, according to the median of 31 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.7 percent after being revised down in February.

Auto Jobs

Executives from Germany’s Bayerische Motoren Werke AG said last week that they see potential in Europe for new models amid a gradual economic recovery and French carmaker Renault SA plans to hire at its Valladolid plant in Spain to increase output.

Still, Europe’s fragile labor market remains a concern for its leaders with February unemployment rates varying from a low of 4.8 percent in Austria to 25.6 percent in Spain. Greece, which last reported in December, had a jobless rate of 27.5 percent. Among people under the age of 25, unemployment in the 18-nation currency bloc stands at 23.5 percent.

“Weak inflation in March and continued difficulties on the labor markets are already well anticipated by the ECB,” said Anatoli Annenkov, senior economist at Societe Generale SA in London. “What’s needed in Europe is to see a trend break in unemployment and faster job creation, but more structural reforms will be needed for that.”

Weak Recovery

ECB President Mario Draghi said last week that the central bank’s accommodative monetary policy should increasingly have an impact on the economy as disruptions in the financial system wane. Even so, the Frankfurt-based central bank is determined to act if “downside risks” appear, he said.

The ECB estimates that the euro-area economy will expand 1.2 percent this year after it shrank 0.5 percent in 2013. Unemployment will average 12 percent this year and 11.8 percent in 2015, economists forecast in a separate Bloomberg survey.

“For the ECB, the data reaffirms a very weak recovery, but that makes the case for action less compelling,” RBC’s del Carpio said. “It shows the recovery, as weak as it might be, is still continuing and is expected to continue over the coming year.”

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