Is Europe on Track?
Not sure. Later this week we will get the first look at euro-zone inflation for August and expectations are for another disappointing reading. Growth in consumer prices slowed to 0.4% year-on-year in July and most economists forecast that the recent slide in energy prices will pull August inflation down to 0.3%. At that level, inflation is far below the ECB target of 2.0% and squarely in what many experts consider the "danger zone". Without price stability, Europe will have a tough time continuing on its current path to economic recovery. A soft reading on inflation may finally encourage the ECB to go the QE route, a journey that the US is currently trying to unwind from.
Euro-zone unemployment remained elevated at 11.5% in June. Last week, while attending the Fed summer retreat in Jackson Hole, ECB President Mario Draghi offered this on the stubbornly high unemployment still gripping much of Europe. "Everyone in society is affected by high unemployment. For central banks it is at the heart of the macro dynamics that determine inflation, and even when there are no risks to price stability it increases pressure on us to act." He further argued that "more unconventional action may be needed, but that increased flexibility on fiscal policy across the region and efforts to overhaul the labor market are crucial. He also hinted that bigger countries in healthy shape need to do more to drive demand."
The challenges faced by Europe on its difficult road to recovery are having an impact here in the US. Also in Jackson Hole, St. Louis Fed Chief James Ballard said that "the biggest risk right now in the global economy is Europe. In trying to understand the latest data and assessing the potential for further slowdown, I remain concerned that Europe was supposed to be coming out of recession and may be going right back into recession, so hopefully that does not happen."
