European markets bullish despite economic woe for UK and eurozone

A RISE in UK inflation and the prospect of the eurozone sliding into recession failed to derail the stock market yesterday.

Investor sentiment was buoyed by better-than-expected economic data from France and Germany, while economists predicted that consumer price inflation in the UK would continue to moderate despite a July blip.

But there were concerns that Germany – Europe’s largest economy – could be heading for a fall unless decisive action is taken to tackle the single currency bloc’s ballooning debt crisis.

In London, the benchmark FTSE 100 index closed up 32.9 points or 0.6 per cent at 5,864.8, Germany’s Dax gained almost 1 per cent while in France the Cac-40 index rose by 0.7 per cent.

Official figures revealed that the eurozone – Britain’s biggest trading partner – shrank by 0.2 per cent between April and June. A further quarter of contraction would push it into a double-dip recession.

The downturn would have been worse were it not for better-than-expected gross domestic product (GDP) growth of 0.3 per cent in Germany and a flatlining French economy, where analysts had pencilled in a fall. Commerzbank economist Joerg Kraemer described Germany’s growth as “pretty solid”, but he warned: “This could be the last positive piece of news out of Germany for some time.

“The German economy could contract in the summer. It is fundamentally in good structural shape, but can’t decouple from the recession in the eurozone.”

Think-tank the Centre for Economics and Business Research (CEBR) warned this week that global growth would probably be “sluggish at best” for the next four years while data showed Greece mired firmly in recession, GDP contracting by an annualised rate of 6.2 per cent in the second quarter.

On yesterday’s Eurostat estimates, Tim Ohlenburg, senior economist at the CEBR, said: “The fall in second-quarter European output adds to the world economy’s downward momentum.

“Falling trade growth compounds a difficult global situation, leaving the rising purchasing power of emerging market middle classes as the best hope for recovery, albeit an uncertain one.”

Closer to home, the Office for National Statistics unveiled a surprise rise in consumer price inflation last month, to 2.6 per cent from 2.4 per cent a month earlier.

Experts had expected the figure to be unchanged or slightly lower, though the data revealed a sharp rise in airfares while clothing retailers reined in seasonal discounts. UK bond futures briefly fell on the news and sterling touched a two-week high against the dollar.

Last week, the Bank of England cut its inflation forecast, seeing it nearly back at its 2 per cent target by the end of this year.

David Kern, chief economist at the British Chambers of Commerce, said: “Despite this setback, the downward trend in inflation seen in recent months is likely to continue.

“Since inflation has been above the 2 per cent target for a prolonged period, a temporary fall below this should not be a cause for concern. If inflation does fall, the economy would benefit since the squeeze on businesses and consumers would support demand in the economy.

“With this in mind, the Bank of England should not use additional quantitative easing, which concentrates solely on buying gilts, to limit temporary falls in inflation.”