The Eurozone and its neighbours seem to have caught a nasty dollop of US misery. Economic woe is spreading, but at last good news, real good news, seems to have emerged on inflation. Maybe the Eurozone can shake off the jitters of mid-2008, and get back on track?

Latest data out during the last few days revealed that Germany’s GDP contracted by 0.5 per cent in the second quarter; France also saw contraction and now the Bank of France is predicting growth of just 0.1 per cent in the current quarter. Spain expanded by 0.1 per cent in Q2 – remember Spain has been expanding very rapidly indeed until recently, and while many expected the pace of growth to slow, few expected Spain to move so close to recession territory so quickly.

Even Scandinavia is feeling the pinch. Denmark has already hit recession, while house prices in Copenhagen are down 1.7 per cent over the last 12 months, or so says the Association of Danish Mortgage Banks.

At least in the land of the fjords things seem to be keeping up. Mainland Norway saw a mild contraction in Q1, but in its second quarter the economy expanded at a brisk 0.6 per cent.

It could be argued that much of the Eurozone’s problems are self-inflicted. The ECB has taken far too tough a stance on interest rates – but then, equally, it is possible that the ECB, by acting so precipitately, has managed to avoid the development of deeper problems.

Official statistics suggest the Eurozone CPI rate fell in July, from 3.3 per cent the previous month to 3.1 per cent. Maybe at last we are seeing signs of the inflation beast returning to its cave.

If this does happen, markets will not be surprised. As Capital Economics puts it: “The breakeven inflation rate on constant maturity 10-year index-linked OATs has already declined by over 40bp since the beginning of July.”

If the price of oil really does stabilise at its current level, it has been calculated that as much as 1.9 percentage points could be knocked off inflation within 9 months. Presumably, if oil falls in price, inflation will fall even further. Add to that the deflationary effects of the credit crunch, and the poor showing in economic growth, and it seems there are good reasons to believe Eurozone inflation could fall rapidly. This in turn could allow the ECB to realign interest rates, and perhaps a lot more quickly than people expect.

The Eurozone surprised many by moving close to recession so quickly. It is possible that, because the ECB kept such a tight lid on inflation, the region may be way ahead of the US and UK, and be the first to recover.

© Investment & Business News 2013