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UPDATE 1-Euro zone export slowdown strengthens case for rate cut
September 17, 2012 / 1:27 PM / 5 years ago

UPDATE 1-Euro zone export slowdown strengthens case for rate cut

* Euro zone adjusted exports slow in July from previous month

* Data points to Q3 slowdown

* Euro zone wage growth limited in Q2

By Jan Strupczewski

BRUSSELS, Sept 17 (Reuters) - A slowdown in euro zone exports in July, plus muted wage growth, could increase the odds for an interest rate cut by the European Central Bank before the end of the year to try to revive the region's economy.

The export data, published on Monday, showed the heightened risks of the euro zone sliding into recession in the third quarter after it contracted 0.2 percent year-on-year in the second quarter.

The European Union's statistics office said the unadjusted trade surplus in the 17 countries using the euro was 15.6 billion euros ($20.51 billion) in July, up from 2.1 billion a year earlier.

Exports surged 11 percent in annual terms and imports only 2 percent.

But adjusted for seasonal factors, the trade surplus was only 7.9 billion euros, down from 9.3 billion in June, as exports fell 2 percent month-on-month and imports eased 1.2 percent.

"The sharply increased euro zone traded goods surplus for July masks some worrying developments," said Howard Archer, economist at IHS Global Insight.

"The appreciable drop in euro zone (adjusted) exports in July heightens concerns that slower global growth is increasingly weighing down on foreign demand for euro zone goods," Archer said.

"This reinforces belief that the euro zone is headed for further GDP contraction in the third quarter," he said. "We expect the ECB to trim interest rates to 0.50 percent in the fourth quarter with a move highly possible as soon as October."

Eurostat also released data on Monday showing total hourly labour costs grew only 1.6 percent year-on-year in the second quarter.

Economists said this was likely to keep inflationary pressures subdued and add to arguments for an ECB rate cut before the end of the year.

"Although euro zone consumer price inflation climbed back up to 2.6 percent in August from 2.4 percent in July, there seems little reason why the ECB cannot cut interest rates from 0.75 percent to 0.5 percent," Archer said.

COMPETITIVENESS ADJUSTMENT

Detailed Eurostat trade data for July was not yet available but the breakdown for the January-June period showed export growth was mainly driven by sales of machinery, vehicles and other manufactured goods.

This offset more expensive imports of energy, and smaller imports of raw materials also helped.

The main export engine is Germany, which is responsible for more than half of euro zone exports.

The second biggest contributor to the unadjusted trade surplus is the Netherlands and the third biggest Ireland.

Some of the growth of exports from these two countries could reflect an increase in competitiveness - their second quarter labour costs grew just a fraction of the overall euro zone annual increase.

In Ireland, labour costs grew 0.4 percent year-on-year and in the Netherlands, labour costs grew 0.5 percent.

Greece and Portugal, which like Ireland are trying to boost competitiveness, also managed to export more.

In Greece, unadjusted exports surged 15 percent year-on-year in the first half. The country's labour costs continued to fall, with the latest available data for the first quarter showing an 11.5 percent decline in total hourly costs.

Portugal's unadjusted exports rose 9 percent in the first six months of the year and labour costs were up 0.7 percent in the second quarter after a 1.2 percent decline in the first.

In Spain, where a quarter of the workforce is without jobs, labour costs rose 0.5 percent in the second quarter, but unadjusted exports were up only 1 percent in the first half.

In Italy, which is also reforming to show markets it can service its huge public debt despite slow growth, labour costs grew 1.1 percent and unadjusted exports increased 4 percent in the first six months.

In Germany labour costs climbed 2.5 percent and in the euro zone's second biggest economy, France, they rose 2.0 percent - well above the euro zone average.

For Eurostat release on July trade data:

For Eurostat release on Q2 hourly labour cost data:

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