Economic data out of the Euro-zone highlighted the European Central Bank’s biggest challenge: remaining focused on price stability as growth in the region slows. First, the Euro-zone’s seasonally adjusted current account balance hit a record low of -15.3 billion euros, as the strength of the currency hurt export growth.
Indeed, the balance of goods payments fell 3.9 billion euros from a surplus of 4.5 billion euros last month. Furthermore, the services, income, and transfers balances all eased lower as well. Waning foreign demand for European goods will certainly take a toll on businesses in the region, particularly manufacturers, which will only add to the downside risks to growth associated with tighter credit conditions and building price pressures. Indeed, we also saw that the preliminary CPI reading for Germany – the Euro-zone’s largest economy – showed a greater than expected rebound through May as the index rose 0.6 percent. The monthly gain matched the biggest jump in 17 months, while the annual number was similarly strong at 3.0 percent, which is well above the ECB’s 2.0 percent target. With energy prices persistently hanging on to record highs and food costs refusing to ease, the risks to inflation are clearly to the upside. As a result, it is clear that the ECB will have little choice but to ignore the softening in the economy in order to maintain their hawkish inflation stance by leaving rates unchanged at 4.00 percent.