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Eurozone Inflation Rises Slightly as Germany Faces Retail Slump

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Annual inflation in the eurozone increased slightly to 2.3% in November, up from 2% in October, according to preliminary data from Eurostat released on Friday. The rise aligns with market expectations and reflects diminishing deflationary pressure from energy prices.

Despite the uptick in annual inflation, monthly data revealed a 0.3% decline in consumer prices compared to October — the steepest drop since January 2024. This decline signals potential easing of underlying price pressures, bolstering hopes that the eurozone’s disinflationary trend is intact and could pave the way for the European Central Bank (ECB) to lower interest rates in December.

Energy prices, a key inflation driver, were down 1.9% year-on-year in November, although the rate of decline has moderated compared to 4.6% in October and 6.1% in September. On a monthly basis, energy prices edged up by 0.6%.

Core inflation, which excludes energy and food prices, rose slightly to 2.8% year-on-year, up from 2.7% in October. However, monthly core inflation fell by 0.4%, hinting at easing underlying price pressures. Services prices, a historically “sticky” component, rose 3.9% annually but recorded a significant 0.9% monthly decline, offering a positive outlook for inflation.

Economic Outlook and ECB Policy

The November inflation figures align with expectations that disinflation remains a dominant force. This trend strengthens the case for the ECB to lower interest rates during its December meeting, particularly as economic activity across the eurozone continues to weaken.

Recent Purchasing Managers’ Index (PMI) data underscores the region’s economic struggles. The Eurozone Composite PMI dropped to 48.1 in November, down from 50.0 in October, marking the sharpest contraction since January. While the manufacturing sector remains in decline, the services sector has also slipped into contraction for the first time in 10 months, with its PMI falling to 49.2 from 51.6.

Kyle Chapman, a forex market analyst at Ballinger Group, remarked, “The market expects a 25-basis-point cut in December. While the economy isn’t collapsing, the ECB has room to cautiously adjust rates without frontloading aggressive cuts.”

German Retail Sales Plunge

Germany, the eurozone’s largest economy, reported its steepest retail sales drop in two years. Retail sales fell by 1.5% month-on-month in October, far exceeding market expectations of a 0.3% decline. This drop follows a 1.6% rise in September and highlights the ongoing challenges in consumer spending.

The weak retail performance reflects deteriorating consumer confidence, adding to concerns about the region’s economic fragility.

Market Reactions

Financial markets remained stable following the data. The euro traded at $1.0560 against the US dollar, while Germany’s 10-year Bund yield held at 2.12%, its lowest level in nearly two months.

Equity markets were flat, with the Euro STOXX 50 index unchanged. Gains from Airbus SE and Schneider Electric SE balanced declines in Telefonica and Banco Santander.

As the ECB prepares for its next policy decision, the region’s economic and inflation dynamics remain in sharp focus.

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Richemont’s Strong Quarterly Results Boost European Luxury Stocks

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Richemont reported impressive quarterly results on Thursday, driven by festive season sales, even as weak demand in China weighed on performance. The Swiss luxury goods giant’s robust earnings sent ripples through the European luxury sector, lifting share prices of major rivals.

Richemont’s stock surged over 16% to reach a record high of ₣161.8 (€172.45) on the Zurich Stock Exchange, marking its largest intraday gain since October 2008. The company has been a standout performer, with its share price up 21% in 2024, contrasting sharply with declines seen in other major luxury players such as LVMH and Kering last year.

Strong Fiscal Third-Quarter Performance

For the fiscal third quarter of 2025, Richemont reported sales revenue of €6.2 billion, a 10% increase year-on-year, exceeding analyst expectations. While sales in mainland China, Hong Kong, and Macau collectively fell by 18%, resulting in a 7% decline in the Asia-Pacific region, robust growth in Europe, the Americas, Japan, and the Middle East & Africa offset the weakness.

European revenue surged by 19%, bolstered by increased domestic demand and higher tourist spending from North America and the Middle East. The Group’s Jewellery Maisons—Buccellati, Cartier, Van Cleef & Arpels, and Vhernier—achieved 14% growth, driven by iconic jewellery and watch collections during the festive season.

However, Specialist Watchmakers experienced an 8% drop in revenue year-on-year, reflecting the challenges in the Asia-Pacific market. Despite this, strong growth in the Americas and the Middle East & Africa mitigated the impact, reducing the year-to-date segmental decline to 16%.

Year-to-Date Highlights

For the nine months ending December 31, 2024, Richemont recorded a 4% increase in sales at constant currency, with net cash rising to €7.9 billion from €6.8 billion in 2023. The company ended the fiscal year 2024 with record full-year sales of €20.6 billion, though quarterly sales dipped by 1% due to the Asia-Pacific slowdown.

CEO Nicolas Bos, who took over in June 2024, is credited with steering the group toward growth in alternative markets, mitigating the effects of weakened Chinese demand, a factor emphasized by former chairman Johann Rupert.

Luxury Sector Optimism

Richemont’s results buoyed the Euro Stoxx 600 Luxury Ten Index (STXLUXP), which rose nearly 7% on Thursday. Stocks of rivals LVMH, Hermès, Christian Dior, and Kering gained 9%, 4.9%, 8.6%, and 6%, respectively.

Analysts are divided on whether the downturn in Chinese luxury spending is cyclical or structural. With China accounting for a significant portion of the Asia-Pacific market, brands heavily reliant on Chinese consumers may face continued challenges in 2025. However, optimism surrounding Richemont’s results has injected renewed confidence into the sector ahead of upcoming earnings reports.

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Germany’s Inflation Rate Hits 2.6% in December Amid Economic Struggles

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Germany’s year-on-year inflation rate for December was confirmed at 2.6%, according to the Federal Statistical Office, marking the third consecutive month of growth and the highest rate since January 2024. The increase was driven primarily by rising services and food prices, leaving inflation above the European Central Bank’s (ECB) 2% target.

Key Drivers of Inflation

Services prices surged at an annual rate of 4.1% in December, slightly higher than November’s 4%. Food prices also saw an uptick, climbing to 2% from 1.8% in the previous month. Meanwhile, energy prices, which had been declining, fell at a slower pace in December, recording a decrease of 1.6%, compared to a 3.7% drop in November.

Month-on-month inflation also rose, reaching 0.5% in December, up from a decline of 0.2% in November and exceeding preliminary estimates of 0.4%.

For the entire year of 2024, the average inflation rate stood at 2.2%, a significant drop from the 5.9% recorded in 2023. Core inflation, which excludes volatile items such as food and energy, fell to 3% in 2024 from 5.1% the previous year.

Economic Contraction Continues

Germany’s economy shrank by 0.2% in 2024, following a 0.3% contraction in 2023, according to recently released gross domestic product (GDP) data. The contraction reflects ongoing challenges in key sectors.

Manufacturing output declined by 3% in 2024, weighed down by sluggish performance in the car manufacturing and machinery sectors, two pillars of the German economy. The construction sector also experienced a sharp decline, shrinking 3.8% due to rising interest rates and soaring construction costs.

On the other hand, household consumption rose marginally by 0.3% for the year, supported by increased spending on transport and health.

Challenges for Growth

Both structural and cyclical pressures have impeded Germany’s economic growth. Surging competition in key export markets has created challenges for the country’s export-driven economy. Additionally, higher energy costs and geopolitical uncertainties, including trade tensions and conflicts, have exacerbated economic vulnerabilities.

Outlook and Policy Implications

The persistent inflationary pressures and economic stagnation present a complex challenge for policymakers. While inflation remains above the ECB’s target, the broader economic slowdown may necessitate continued monetary and fiscal measures to support growth.

As Germany grapples with structural weaknesses and external risks, economic recovery will likely depend on addressing these challenges while maintaining consumer confidence and industrial competitiveness.

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ECB Cuts Interest Rates to 3% Amid Divisions Over Policy Approach

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The European Central Bank (ECB) reduced its key interest rate by 25 basis points to 3% during its December meeting, aiming to bolster the struggling eurozone economy. However, meeting minutes released on January 16 revealed sharp disagreements among policymakers over the extent of intervention needed to address the economic slowdown.

Debate Over Rate Cut Size

The rate cut was largely driven by slowing growth and easing inflation, with updated projections indicating a sluggish economic recovery for the eurozone. While the Governing Council unanimously supported the 25-basis-point reduction, there was a split on whether a more significant move would have been appropriate.

Advocates for a 50-basis-point cut argued it would offer a stronger buffer against downside risks. “A larger rate cut would provide insurance against weaker growth projections,” some members noted, pointing to repeated downgrades in economic forecasts.

However, others cautioned that a more aggressive cut could send unintended signals to financial markets. “A 50-basis-point reduction might suggest the ECB is overly pessimistic about the economic outlook,” the minutes highlighted, adding that such a move could create uncertainty among investors.

Rising Political and Global Risks

The ECB’s deliberations also considered geopolitical and trade-related uncertainties. Members expressed concerns about potential new U.S. tariffs on Chinese goods, which could disrupt global trade and indirectly impact European inflation and growth.

Closer to home, political instability within the eurozone added to the complexity of the ECB’s policy decisions. France’s challenges in forming a stable government and Germany’s upcoming snap elections in February were flagged as potential risks to economic stability.

“Uncertainty about U.S. trade policies has been compounded by greater policy uncertainty in Europe,” the minutes noted, emphasizing the importance of stable European institutions during this turbulent period.

Future Outlook

Despite the rate cut, the ECB refrained from outlining a clear trajectory for future monetary policy. Officials emphasized a “data-dependent and meeting-by-meeting approach,” stating that future decisions would hinge on incoming economic data.

A significant challenge for the ECB is addressing structural economic weaknesses that monetary policy alone cannot resolve. Policymakers underscored the need for governments to adopt measures that address long-term growth issues.

While markets anticipate additional rate cuts in 2024, the timing and magnitude remain uncertain. The ECB faces the delicate task of balancing the need for economic support with avoiding actions that could undermine market confidence.

With inflation cooling but geopolitical risks on the rise, the ECB’s next moves will likely reflect a careful navigation of both immediate and long-term challenges.

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