By Paul Hannon
Consumers in the 18 countries that share the euro became
slightly more upbeat in December, likely reflecting the boost to
real incomes from falling oil prices.
The pickup in confidence indicates that household spending may
increase slightly in coming months, a development that would help
the eurozone economy avoid a slide back into contraction despite
weak business investment and disappointing export sales.
The European Commission on Monday said its preliminary measure
of consumer confidence rose to minus 10.9 in December from minus
11.5 in November. The consensus forecast of 15 economists surveyed
by The Wall Street Journal last week was for a rise to minus
11.0.
Economists often compare falling oil prices to declining income
or sales tax rates, since they leave households with more money to
spend on other goods and services. The recent sharper fall in oil
prices is likely to have made many eurozone households feel better
about their near-term financial positions.
Indeed, consumer spending has edged higher in the eurozone as
the inflation rate has fallen over recent quarters, expanding by
0.5% in the third quarter, having increased by 0.3% in the second
and 0.2% in the first.
When inflation rates were higher, policy makers would likely
have ignored falling oil prices, expecting the boost to real
household spending power to compensate over the medium term, as
prices of other goods and services rose.
But right now, falling oil prices mean the eurozone's annual
rate of inflation is likely to turn to negative in coming months,
as consumer prices dip below the levels recorded in late 2013 and
early 2014.
Very low levels of inflation can be harmful to economic growth,
crimping company profits and investment, while making it more
difficult for governments and households to reduce high levels of
debt.
And a slide into deflation--or a period of falling prices--would
exacerbate those problems. Policy makers worry that if consumer
prices start to fall, businesses and households will start to
postpone spending decisions in the expectation that goods will be
cheaper in the future. That in turn can become a self-perpetuating
downward spiral, and the case of Japan has shown how difficult it
can be to revive growth after deflation has taken hold.
The European Central Bank has said it would reassess its
existing stimulus policies, which include cheap bank loans and
purchases of asset-backed securities and covered bonds, in early
2015, and decide whether to do more to ensure that annual inflation
moves closer to its target of just below 2%.
-Write to Paul Hannon at paul.hannon@wsj.com