Unemployment in the euro zone is stuck at 12 percent, an already high rate that masks eye-popping rates in many of its struggling member economies.
Euro zone inflation has dipped again and some forecasters are hedging their bets on the policy response by saying the European Central Bank could either cut rates this week or sometime in the next two months.
The last seven days has been a glaring example of fallout from the cross-border carry trade. That’s the sort of trade, well known in currency markets, where investors borrow funds in low-rate countries and invest them in higher-rate ones. Some $4 trillion is estimated to have flooded into emerging markets since the 2008 financial crisis to profit off the ultra accommodate policies of the U.S. Federal Reserve, Bank of Japan, European Central Bank and the Bank of England. Now that central banks in developed economies are looking to reverse course and eventually raise rates, that carry trade is unraveling fast, resulting in the brutal sell-off in emerging markets such as Turkey and Argentina over the last week.
British inflation dipped to 2 percent in December – its lowest since November 2009 and within the Bank of England’s target. Part of the move was driven by a fall in prices in Britain’s services sector – which constitutes more than three quarters of the country’s output.
This afternoon, French President Francois Hollande will expand upon his New Year announcement that French companies who agree to hire more workers could pay lower labour taxes in return and find themselves less tied up in red tape. Unemployment is running near to 12 percent and Hollande’s vow to get it falling by the end of 2013 fell short.
Euro zone inflation, or deflation, is the focus of the moment.
Germany’s HICP rate fell to 1.2 percent last month, Italy’s hit 0.6 percent and Spain’s just 0.3 in December (not to mention Greece’s -2.9 percent). Today we get the figure for the euro zone as a whole. Forecasts for it to hold at 0.9 percent may now look a little toppy.
Barring a last minute change of heart, the European Commission will launch an investigation into whether Germany’s giant trade surplus is fuelling economic imbalances, a charge laid squarely by the U.S. Treasury but vehemently rejected by Berlin.