Europe Ahead: European prices hover near 1% amid recovery signs

Prices in the euro zone decelerated as a consequence of the global downfall that had caused a massive contraction in sectors and slowdown in economic activities. However, with the improvement witnessed recently and the remarkable signs of recovery, prices started to incline leaving the negative areas and heading toward the target level set by the ECB.

Inflation became positive in November for the first time since April and the incline continued in December, seen by the flash estimate indicator which rose to 0.9% from 0.6%. Today, the euro area will release its CPI for December with expectations to come in line with the flash estimate.

The reading was spurred by the rise the general price level in the largest four economies in the euro region, where the reading approached 1% where Trichet expects inflation to remain close to in the near term.

Trichet in the press conference following the rate decision for January, said price pressures will remain subdued and inflation will stabilize over the medium term, as monetary measures confirm low inflation pressure.

Prices benefited from the oil's rally, which after sliding to a low below $33 a barrel in February last year, jumped to highs around $80a barrel in December as an outcome to the pick up in global demand and the dollar's depreciation.

In addition, the monetary measures adopted by the ECB to enhance prices and rekindle growth succeeded, so far, in lifting prices to the upside. These measures spurred economic activities and caused the economy to leave recession in the third quarter by expanding 0.4% and it is on its way to expand more in the fourth quarter, according to the strong data released in the last three months of 2009.

Yesterday, ECB members met to set the interest rate where they left the rate unchanged at its historical low at 1%. The cost of borrowing is expected to remain low this year to support the nascent recovery. Some analysts are expecting a rise to 1.5% by the end of 2010.

Trichet mentioned that excess liquidity will be absorbed when necessary and they will continue exiting stimulus measures and he will call national European governments to implement fiscal exit strategies. Thus, we might witness a gradual scale back to the non-standard measures and a rise in interest rate; depending on the performance of the economy on the coming period.

ECB sees the economy will expand at a moderate pace in 2010 and recovery will be "uneven", as factors supporting the economy are temporary. Also, the ECB governing council is expecting slightly positive growth on average.

The euro area benefited from the rise in exports in expanding in the third quarter, but the appreciation in the value of the euro capped gains. Today, the ECB will release its trade balance for November where expectations are referring to a decline in surplus to 7.0 billion euros from 8.8 billion euros, while the seasonally adjusted is expected to retreat to 5.0 billion euros surplus from the prior surplus of 6.3 billion euros.

In November, the 16-nation currency jumped to a high of 1.5144 against the dollar, which probably affected European sales overseas as commodities became expensive relative to their U.S. counterparts.

The ECB announced in November that the European economy will grow 1 percent in 2010, higher than the previous projections of 0.3%; while in 2009, the economy may contract 3.9% instead of 4.5% contraction predicted in August.

Source: 2009 ecPulse. All Rights Reserved.

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