World News

Euro zone growth below expectations, core inflation slows

By Jan Strupczewski

BRUSSELS (Reuters) – The euro zone economy grew less than expected in the last quarter of 2019, a first estimate showed on Friday, while core inflation slowed in January, a worrying sign for the European Central Bank.

Gross domestic product in the 19 countries sharing the euro rose 0.1% quarter-on-quarter for a 1.0% year-on-year gain, according to Eurostat, the European Union’s statistics office. Economists polled by Reuters had expected a 0.2% quarterly and a 1.1% annual increase.

“The ECB will not like today’s data. This is because it is counting on stronger economic growth to drive inflation up. In fact, the economy actually lost momentum in autumn,” said Christoph Weil, an economist at Commerzbank.

The disappointing growth for the euro zone was mainly caused by GDP contractions in France and Italy, its second and third biggest economies.

The ECB targets inflation below but close to 2% over the medium term, but it has been struggling to hit that target for years, despite its program of government purchases to inject more cash into the economy.

Eurostat said consumer prices fell 1.0% month-on-month in January for a 1.4% year-on-year rise, accelerating from a 1.3% rate in December and 1.0% in November.

But the pick-up in headline price growth was mainly caused by a jump in the volatile prices of food, alcohol and tobacco, which rose 2.2% year-on-year. Energy prices were also up 1.8%.

Without unprocessed food and energy — what the ECB calls core inflation — prices grew 1.3% year-on-year, decelerating from 1.4% in December.

An even narrower inflation measure watched by many market economists also excludes alcohol and tobacco, which can move if excise taxes change. It decelerated even more, to 1.1% from 1.3% in December, year-on-year.

“Headline inflation ticked up, but core inflation fell to 1.1%,” said Bert Colijn, senior euro zone economist at ING bank. “Core was always likely to come back down again as it had trended higher than price pressures warranted at 1.3% over the past two months.”

(Reporting by Jan Strupczewski; editing by Philip Blenkinsop, Larry King)