Eurozone loses some momentum

A day before the European Central Bank meets to decide whether to cut interest rates, further evidence emerged on Wednesday to indicate the economic recovery in Europe is muted.

Eurostat, the European Union's statistics office, said Wednesday that retail sales across the 17-country Eurozone fell 0.6 per cent in September from the month before.

The fall offset the previous month's 0.5 per cent rise and was just below market expectations for a more modest 0.4 per cent decline.

September is the final month of the third quarter, so the drop may alter expectations about how much the Eurozone grew during the period.

Markit, the financial information company, also revealed that its composite purchasing managers' index, a broad gauge of economic activity, faltered in October.

While the October PMI reading of 51.9 points was revised up from the initial estimate of 51.5, it was down from September's 27-month high of 52.2. Still, it's above the 50 threshold indicating expansion.

Though the figures continue to point to a second straight quarter of growth for Eurozone economies, they suggest the recovery lacks strength and is vulnerable to setbacks. Whether that will be enough for the European Central Bank (ECB) to cut its main interest rate to a record low of 0.25 per cent on Thursday remains unclear.

"The loss of momentum raises concerns that the upturn is faltering and piles further pressure on the European Central Bank to reinvigorate the recovery," said Chris Williamson, chief economist at Markit.

Williamson noted that the economic backdrop has been complicated by the fall in the Eurozone's consumer price inflation to a near four-year low of 0.7 per cent in October, which has raised concerns about deflation - a prolonged drop in prices - taking hold. The ECB is tasked with setting policy to keep inflation at just below two per cent.

FEW TRADITIONAL OPTIONS

But with interest rates already at record lows, ECB policymakers will be gathering in Frankfurt knowing they have few traditional monetary policy tools left to shore up the recovery.

The ECB has been reluctant to inject cash in the economy to stimulate growth the way the Federal Reserve has done. A rate cut may also not do much good since banks are still too worried about the economy to lend at low costs.

As such, many economists think the ECB will hold off a rate cut and revisit the issue in December, when it will be armed with its staff's latest quarterly economic projections.

Analysts at Bank of America Merrill Lynch say it's a close call, but expect the ECB to cut the main interest rate Thursday.

"Not doing so could risk being perceived by markets as never be willing to venture into this territory," they said in a note to clients.

- AP