May 27, 2024

Uneven Nature of Recovery Highlighted in Europe

PARIS — The uneven nature of the European recovery was underlined by data released Thursday, which showed prices rising and weak consumption across the euro zone. Portugal’s budget situation worsened even as the economic picture in France and Germany improved.

Officials in Portugal blamed the higher-than-expected deficit figure for 2010 on changes in accounting rules. But coming on the heels of a government collapse and two downgrades, investors sent yields on its 10-year bonds soaring to a new euro-era high, raising the pressure as the country struggles to avoid having to ask for a financial rescue.

Portugal’s woes are worsened by a weak economy and rising prices.

For the entire euro area, the European Union’s statistics agency reported that annual inflation rose to 2.6 percent in March from 2.4 percent in February, according to an initial estimate.

Analysts said higher oil and food prices remained the main factors behind the rise. But they added that the tightening labor market in countries such as Germany, as well as potential price increases by companies facing higher commodity costs, are likely to push up core inflation over the coming months. Core inflation excludes the more volatile energy and food categories.

The Federal Labor Agency in Germany reported that the largest economy in Europe continued to add jobs in March. German unemployment dropped by a seasonally adjusted 55,000 for the month, bringing the jobless rate down to 7.1 percent, from 7.3 percent in February. It was the lowest unemployment rate since the country’s reunification in 1990, according to economists.

At the same time, a separate report from the Federal Statistical Office showed that German retail sales fell by 0.3 percent in February from January, when they had risen 0.4 percent.

Carsten Brzeski, at analyst at ING in Brussels, said the data “again illustrated the German economy’s main dilemma: While the labor market remains the show case of the recovery, private consumption is still sluggish.”

The strong job market is only gradually lifting consumption because many of the jobs created pay low wages, while higher energy prices have dampened spending, he said.

The latest data have solidified expectations that the European Central Bank next week will raise borrowing costs for the euro area, given that inflation is riding well above its comfort zone of just below 2 percent. Analysts at Barclays Capital said there is also a growing expectation such an increase might be repeated.

Chiara Corsa, an economist at UniCredit Bank in Milan, said euro-zone inflation was likely to pick up throughout the summer, before starting to decline at the turn of the year. UniCredit expects an average 2.6 percent in 2011 and 2 percent next year.

In Lisbon, the national statistical office said that Portugal’s budget deficit last year was 8.6 percent of G.D.P., well above the target of 7.3 percent. The finance minister Fernando Texeira dos Santos said that the difference was due to new E.U. accounting rules, and not as a result of unreported items, Reuters reported.

He said the impact on public accounts would be limited to 2010 and that the 2011 budget goal would not be at risk. He also said the caretaker government would have enough funds to meet obligations until a new government takes office.

Yields on Portuguese government bonds pushed to fresh records as investors bet on a near-term bailout. The benchmark 10-year issue rose 21 basis points to 8.1 percent, while the 2-year note climbed 53 basis points to stand at 8.2 percent, showing that the same high returns are now being demanded for holding Portuguese paper of all maturities. Spanish and Irish yields also climbed.

By contrast, the French statistics agency reported Thursday that the country registered a narrower budget deficit of 7 percent of gross domestic product last year, from 7.5 percent in 2009 and was under the government’s own target, which had initially stood at 8.5 percent.

Germany had a budget shortfall of 3.3 percent of G.D.P. last year, the according to data released last month.

Nevertheless, President Nicolas Sarkozy, currently in Asia, was quick to claim credit for the better than expected performance in France, which is likely to feature as a key theme in next year’s presidential election.

His office issued a statement saying that the data confirmed the effectiveness of government’s strategy based on economic reforms and strict spending control, “while refusing a general increase in taxes, which would prejudice growth and competitiveness.”

The ratings agency Fitch displayed less optimism for the region as a whole. It lowered its economic forecasts Thursday, “reflecting the persistent drag from fiscal consolidation, as well as lower consumption and tighter monetary policy in the context of higher oil prices.”

Fitch reduced its euro area G.D.P. forecast by 0.4 percentage point to 1.2 percent for this year, and by 0.3 percentage point to 1.8 percent for 2012.

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