BUSINESS

ECB may need to offer additional support

The euro zone’s trade surplus in goods with the rest of the world rose in May, boosted by a 6 per cent increase in exports, but imports were unchanged from a year earlier, highlighting that weak domestic demand continues to weigh on the economy, data from the European Union’s statistics agency showed Monday, WSJ reports. In a separate press release release, Eurostat confirmed that consumer-price inflation held steady at 2.4 per cent on an annual basis in June. A considerable drop in energy costs was countered by an increase in the price of food, alcohol and tobacco. The 17 countries that use the euro had a combined trade surplus of EUR 6.9 bln in May. That compared with a EUR 3.7 bln surplus in April and a EUR 1.2 bln deficit in May 2011. Eurostat had previously estimated the April trade surplus at  EUR 5.2 bln. Exports were 6 per cent  higher in May 2012 than a year earlier at EUR 157.6 bln, but imports were flat over the same period at  EUR 150.7 bln, the data show. The rise in exports comes as the euro is softening against other currencies, while manufacturers and exporters’ costs are also easing and helping to improve businesses’ profit margins. However, those details also show just how weak domestic demand across the euro zone is and are likely to add to fears that the 17-country economy shrank in the second quarter of this year after narrowly avoiding a return to recession in the first three months of the year.The data also suggest the European Central Bank may need to offer additional support to an economy struggling to expand amid the debt crisis which is increasingly taking its toll across all 17 countries, rather than just the smaller, peripheral members. “While the euro-zone trade data for May show a decent trade surplus, this masks generally worrying trends,” said Howard Archer, chief euro zone and U.K. economist for IHS Global insight. “Even allowing for import values being brought down by lower oil prices, this points to weak euro-zone domestic demand.”Inflation, however, is expected to remain subdued, and slow further over the coming months. That would give the ECB scope to implement additional growth-boosting plans after its decision to cut its key rate by 0.25 percentage point to 0.75 per cent at its July meeting.”We continue to forecast the inflation rate to decrease before reaching 2% around the turn of the year, slightly earlier than the ECB’s Governing Council expects, and for it to undershoot the ECB’s price stability target throughout 2013,” said Gustavo Bagattini, European Economist for RBC Capital Markets. “This will provide support for the Governing Council to make a further cut to the refinancing rate in September.”

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