Eurozone exits deflation but unemployment remains high

Anna Sonny, 1 May 2015

Eurozone leaders have been given a boost after data published by Eurostat, the EU’s statistic office, shows that the bloc is now out of deflation.

Fears of falling prices, particularly oil, leading to a dent in demand and a stall in consumer spending prompted the European Central Bank (ECB) to introduce a quantitative easing program in March; the buying up of government bonds along with a recent rise in oil prices – which now look more likely to rise than fall – now seem to be lifting the euro area out of the danger zone slightly earlier than expected. The inflation rate rose from -0.1% to 0% in April. The change is small but signifies a leap forward in exiting deflation, which was threatening to drag the Eurozone’s economy to a standstill. The ECB’s target inflation rate is 2%, so there is still some way to go.

Some economists say it is too early for the effects of the quantitative easing program to have filtered through, and it is perhaps the promise of the program that has inspired optimism; others are already predicting that it may not be necessary to continue with the program if the economy continues to look up.

Despite the optimism surrounding the data, the figures for unemployment, which were expected to fall, remain unchanged at 11.3%. The fact that unemployment is still high and growth in wages is weak is not good news for consumer demand, especially with retail sales falling in Germany and consumer spending falling in France.

While the Eurozone economy finally enters inflation, more needs to be done to get Europe’s unemployment levels down so that this doesn’t add more deflationary pressure on the bloc. The right amount of inflation is good for economic growth, but it does mean rising prices for customers, and higher oil prices will mean less spare cash in their pockets.  Higher levels of employment across the Eurozone will mean that European citizens can reap the benefits from economic growth.