High oil prices curb spending across Europe

http://business.timesonline.co.uk/article/0,,16849-1758918,00.html


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Economics
September 01, 2005 High oil prices curb spending across EuropeBy Gabriel Rozenberg
HIGH oil prices slowed spending rates of European consumers for the first time in three and a half years in the last quarter, causing growth to be revised down, according to the latest snapshot of the eurozone economy.
Yesterday Eurostat, the European statistics agency, revised down the second-quarter annual growth figure to 1.1 per cent from 1.2 per cent. Gross domestic product in the 12-nation bloc expanded by 0.4 per cent in the first quarter and 0.3 per cent in the second quarter, the agency said.
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Analysts said that the slowdown was mainly a result of a decline in household consumption, which contracted by 0.1 per cent, the first time in 14 quarters.
Elga Bartsch, of Morgan Stanley, said: “The main common factor is likely to have been the oil price, which has eaten into consumers’ real purchasing power.”
But despite oil prices reaching record highs in the past month, inflation in the eurozone slowed to 2.1 per cent in August from 2.2 per cent in July, Eurostat estimated.
Economists said the fall was probably caused by the high comparison base from last August and seasonal effects, such as a drop in the prices of food and clothing.
The European Central Bank does not expect eurozone inflation to fall below 2 per cent until the middle of next year at the earliest because of the continued rise of oil prices, banking sources said.
That would make an interest rate cut in the eurozone unlikely because the ECB aims to keep inflation below but close to 2 per cent.
The Bank is expected to keep rates on hold at 2 per cent at its monthly meeting today.
Holger Schmieding, of Bank of America, said: “Despite buoyant money supply and credit growth, the European Central Bank should have no reason to edge closer to a rate hike this Thursday.
“While non-oil inflation remains subdued, most hard data on the real economy continue to be mildly disappointing.”