ECONOMY

Oil pushes up eurozone prices, unemployment rises

Unemployment in the eurozone in January hit its highest since the launch of the currency area but a rise in inflation underlined concerns over oil prices that is likely to prevent swift further moves by the European Central Bank to help growth.

As the 17-nation currency area heads into its second recession in three years, relief that the eurozone has put the worst of its debt crisis behind it is being tainted by rising world crude prices and only mildly improving business morale.

Unemployment in the eurozone rose to 10.7 percent in January, while inflation, while down from last year’s peak, rose slightly to 2.7 percent in February, the EU’s statistics office Eurostat said.

“There’s a huge divergence between the feelgood factor in the stock market and what’s happening in the real economy,» said Steen Jakobsen, chief economist at Saxo Bank.

“For all the money the European Central Bank is printing, there isn’t yet a big boost for companies in terms of credit,» he said, referring to this week’s offer of 530 billion euros in cheap three-year loans to banks.

The European Commission expects the eurozone’s economic output to shrink 0.3 percent in 2012, and data released separately on Thursday showed that the manufacturing sector contracted for the seventh straight month in February.

New orders continue to fall and backlogs of work dry up, even in the region’s healthiest economy Germany.

The eurozone’s economic slump has helped bring rises of prices of goods, fuel and food down for consumers from last year’s peak of 3 percent, but oil costs hit record highs in euro terms last month overturning the overall downward trend.

“The chance of seeing headline inflation fall durably below 2 percent in the course of the year has clearly diminished,» said Peter Vanden Houte, an economist at ING.

Crude prices are trading around 10-month highs and there is limited spare production capacity worldwide. There are also signs that Western trade sanctions against Iran, which are aimed at curbing its nuclear ambitions, are strangling its exports even before they go into effect.

That suggests the ECB is likely to put off any quick decision to take interest rates to below 1 percent for the first time and economists expect the bank to remain in «wait-and-see» mode at its March policy meeting next week.

The bank wants to keep inflation below, but close to 2 percent over the medium term. Stripping out volatile energy and food prices, inflation in January was 1.9 percent on an annual basis, Eurostat said on Wednesday.

[Reuters]