Euro zone set for slowdown

 

A fresh spate of German and French data yesterday offered more signs that the euro zone was cooling down, with dis-inflationary forces well at work in Europe's largest economy and French industry losing steam.

Economists said a further decline in inflation, highlighted by December cost-of-living reports from west German states, was in itself not a signal for action by the European Central Bank (ECB).

But the record low inflation combined with the bearish outlook for the euro zone manufacturing sector may prompt the ECB to follow up the December 3rd round of co-ordinated interest rate cuts and ease rates again some time in the first half of 1999.

"Low inflation as such is no reason for a rate cut as the ECB has no inflation target, but a lack of price pressures creates room for lower rates if it is needed to counter weakening growth," said Mr Stefan Schneider, economist at Paribas in Frankfurt. He said the euro zone manufacturing sector could slip into a recession in the coming months.