By Brian Blackstone
FRANKFURT--Europe's economic prospects worsened as inflation
across the euro area weakened again and unemployment in Italy
reached its highest rate in nearly four decades--putting added
pressure on the European Central Bank to step up its stimulus
campaign.
The newest data came as a drop in oil prices threatens to soften
inflation further below the ECB's objective, to as low as zero by
the start of next year.
Other reports Friday confirmed a grim outlook for much of the
eurozone's $13.2 trillion economy, the world's second largest after
the U.S. Unemployment across the region rose by 60,000 last month,
keeping the unemployment rate at 11.5%, the European Union's
statistics agency Eurostat said, far higher than in the U.S.
Consumer spending fell in France and Spain.
Eurostat also said consumer prices were just 0.3% higher in the
eurozone in November on an annual basis versus 0.4% in October,
matching a five-year low. The inflation rate has now been below 1%
for 14 straight months, while the ECB targets a rate of just under
2%.
"It's a story of economic malaise that has multiple sources,"
said Nick Kounis, economist at ABN AMRO.
And consumer prices are expected to soften further after the
sharp drop in oil prices to four-year lows following the decision
by the Organization of the Petroleum Exporting Countries to
maintain its output target. Analysts at BNP Paribas estimate that
each $10 drop per barrel in oil prices reduces eurozone inflation
by 0.4 percentage point.
Responding to low inflation damped by oil prices is complicated
for the ECB. Although the lower costs depress inflation further
below the bank's target, they also help the economy by freeing up
disposable income for households and businesses to spend and
invest.
The danger for the ECB is that European households and
businesses may not see falling energy prices as a temporary
windfall but rather the continuation of an ultra-weak price trend
that will persist far into the future. This could prompt companies
to put off investment and hiring, for instance. Financial
market-based measures of inflation expectations have fallen in
recent months, suggesting investors are losing faith in the ECB's
ability to meet its target.
Falling oil prices don't feed through to the gasoline pump to
the same extent in Europe as in the U.S., because taxes make up
more of the fuel prices that Europeans pay. However, Europe imports
more of its energy needs than the U.S. does, so that overall a
falling oil price creates mostly winners in Europe and can lift the
economy.
"Both economies benefit, but the U.S. by more," said Luigi
Speranza, economist at BNP Paribas.
Yet the benefits aren't uniform across the 18-country currency
bloc. In Germany, where unemployment is near record lows and
confidence is high, falling oil prices in recent months have
coincided with stronger consumer spending. German retail sales were
up 1.9% in October from September, the sharpest gain in over three
years.
But in France, whose 10.5% unemployment rate is more than twice
Germany's according to common European standards, consumer spending
unexpectedly fell last month. Retail sales were also weak in Spain
where the unemployment rate was 24% in October versus the
eurozone's average of 11.5%.
Italy's 13.2% jobless rate was its highest since 1977. Retail
sales there fell in September for a fifth-straight month.
The benefits for Europe's economy of cheaper oil are also
diluted by the euro's recent weakness against the dollar, which
means Europeans have to pay a little more for dollar-denominated
energy imports. The falling oil price this year has partly been a
reflection of the fact that demand for energy in Europe--one of the
world's biggest energy consumers--has been weak, along with overall
economic demand in Europe.
The eurozone "needs every bit of help it can get," said Howard
Archer, chief European economist at consultancy IHS Global Insight
in London. "But it will need a lot more than an oil-price fall to
help economic activity pick up in the eurozone," he said.
Most analysts expect ultralow inflation to prompt the ECB to
purchase large amounts of government bonds in early 2015 to raise
the money supply and further depress borrowing costs, following a
route taken by central banks in the U.S., U.K. and Japan.
Commerzbank economists said Friday they expect eurozone inflation
to hit zero by January.
"We will do what we must to raise inflation and inflation
expectations as fast as possible," ECB President Mario Draghi said
on Nov. 21. In a subsequent speech five days later, his deputy,
Vitor Constancio, put the ECB closer to buying public debt by
saying specifically that the ECB would consider this option if it
decides its current measures--including bank loans and purchases of
covered bank bonds and asset backed securities--are
insufficient.
But Mr. Constancio's emphasis on the first quarter of 2015
appeared to play down the chances of an explicit announcement as
soon as the ECB's Dec. 4 policy meeting.
"It's just a question of time," before the ECB buys government
bonds, known as quantitative easing, said Mr. Speranza. Analysts at
Citi expect the ECB to launch a government bond program at its Jan.
22 meeting.
Marcus Walker and Paul Hannon contributed to this article.
Write to Brian Blackstone at brian.blackstone@wsj.com