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European consumer prices fell for the first time in June as energy costs dropped and rising unemployment curbed household spending.

Prices in the 16-nation euro area fell 0.1 percent from a year earlier, the first annual decline since the data were first compiled in 1996, the European Union statistics office in Luxembourg said today. The figure matches an initial estimate published on June 30. From May, prices rose 0.2 percent.

Carrefour SA, Europe’s largest retailer, Royal Ahold NV and Tesco Plc are cutting prices to revive demand from consumers restrained by rising job losses. At the same time, oil prices have dropped almost 60 percent from their record a year ago, reducing the cost of gasoline and household heating bills.

“In the coming two years, inflation is not a danger in the euro zone or the U.S. as downward price pressure stemming from the recession continues,” said Martin van Vliet, an economist at ING Groep NV in Amsterdam.

Energy prices dropped 11.8 percent in June from a year earlier and food prices fell 0.2 percent, today’s report showed. Core inflation, which excludes volatile costs such as energy and food, eased to 1.4 percent in June from 1.5 in May. compared to a year ago.

“Core inflationary pressures continued to retreat in June in the face of very weak demand, increasing spare capacity and sharply rising unemployment,” said Howard Archer, chief European economist at IHS Global Insight in London.

‘Limited’ Risk

European Central Bank Governing Council members have highlighted the core rate to downplay the risk of deflation. Michael Bonello said in an interview published on July 13 that negative headline inflation is due to a reversal of the “spike” in energy prices in 2008 and that the “risk of deflation in the short to medium term is rather limited fast cash advance.”

Stores are under pressure to lower prices to boost sales, squeezing profit margins. European retail sales declined in June for a 13th month, the Bloomberg purchasing managers index showed. The economy may shrink 4.8 percent this year and 0.3 percent in 2010, the International Monetary Fund has forecast.

Beer prices in the Netherlands fell the most in almost six years in June as supermarkets stepped up discounting, the national statistics bureau in The Hague said this week. In Ireland, clothes prices have dropped 12.4 percent in the last year.

Awaiting Recovery

“Policy must continue to provide support to the real economy for as long as is necessary,” ECB Governing Council member John Hurley said in Dublin yesterday. “Rates should only be increased once there are clear signs that a sustainable recovery has begun.”

Van Vliet said he expects the core inflation rate to fall below 1 percent in 2010, which could prompt the ECB not to raise its key interest rate in the spring of next year.

The euro extended gains after the data were released and was up 0.7 percent at $1.4060 at 10:44 a.m. in London.

Inflation in Germany, Europe’s largest economy, was flat in June, while prices are already falling in Ireland, Spain, Portugal and Austria, today’s report showed. The ECB, which targets an inflation rate of just under 2 percent, forecasts that euro-area consumer-price growth will average 0.3 percent this year and 1 percent in 2010.

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German investor confidence probably rose to a three-year high this month on signs the contraction in Europe’s largest economy is coming to an end, a survey of economists shows.

The ZEW Center for European Economic Research will say its index of investor and analyst expectations rose to 47.8 from 44.8 in June, according to the median of 36 forecasts in a Bloomberg News survey. That would be the highest since May 2006. ZEW releases the report, which aims to predict economic developments six months ahead, at 11 a.m. in Mannheim today.

Industrial output jumped 3.7 percent in May from April, the biggest gain in almost 16 years, and business confidence increased for a third month in June. The benchmark DAX share index has advanced 28 percent in the past four months. Even as the economy stabilizes from its first-half freefall, the government expects gross domestic product to plunge 6 percent this year, the most since World War II.

“The economic contraction is over,” said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. “However, the recovery will be anemic and slow.”

ZEW’s gauge of the current economic situation probably rose to minus 87.8 from minus 89.7 in June, the economist survey shows.

Volkswagen AG’s luxury Audi division is forecasting “light” growth in auto sales next year following this year’s contraction, Peter Schwarzenbauer, the brand’s sales chief, said on July 8.

Stimulus Measures

HeidelbergCement AG, Germany’s biggest cement maker, said the same day it’s seeing initial signs of improvement in some markets, particularly Asia, as local stimulus packages start kicking in cash advance lenders.

Chancellor Angela Merkel’s government has pledged to spend about 85 billion euros ($117 billion) in an effort to rekindle growth in Germany, including tax breaks and a 2,500-euro payment for consumers who scrap their old car and buy a new one.

The European Central Bank has cut its key interest rate to a record low of 1 percent, offered to lend banks as much cash as they want and started purchasing 60 billion euros of covered bonds to help revive lending.

“The prevailing mood has changed, thanks to the latest positive data but also due to the government stimulus package and lower interest rates,” said Matthias Huth, an economist at Landesbank Baden-Wurttemberg in Stuttgart. “Still, there’s a risk that the green shoots are exaggerated.”

The euro-area economy will probably shrink 4.8 percent this year and 0.3 percent in 2010, the International Monetary Fund said last week.

“The good news is that the forces pulling the economy down are decreasing in intensity,” IMF Chief Economist Olivier Blanchard told a July 8 press briefing. “The bad news is that the forces pulling the economy up are still weak.”

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New Zealand’s retail sales rose for the third time in four months in May, adding to signs that record-low interest rates and income-tax cuts may help the economy emerge from a recession later this year.

Sales gained 0.8 percent from April when they increased 0.5 percent, seasonally adjusted, Statistics New Zealand said in Wellington today. Core retail sales, which exclude car yards, fuel outlets and workshops, surged 1.6 percent, the biggest monthly gain since February 2007.

Higher retail and property sales add to evidence the economy may emerge from the worst recession in three decades by the end of this year. Reserve Bank Governor Alan Bollard kept the benchmark interest rate unchanged last month for the first time in a year, saying household spending may rebound.

“There were some tentative sign of housing-related spending picking up, although this is from a low base and the pickup in housing demand has been relatively modest to date,” said Jane Turner, an economist at ASB Bank Ltd. in Auckland. The report “suggests that underlying consumer demand remains reasonably subdued,” she said.

The increase in sales was four times the 0.2 percent median estimate in a Bloomberg News survey of 10 economists. New Zealand’s dollar bought 62.85 U.S. cents at 11:20 a.m. in Wellington from 62.74 cents just before the report was released.

Interest Rates

Bollard has cut the benchmark interest rate by 5.75 points to a record-low 2.5 percent since July last year. Finance Minister Bill English reduced income taxes on April 1 to help kick-start an economy that shrank for a fifth straight quarter in the three months ended March 31.

The economy may start growing in the fourth quarter of this year, Bollard said on June 11 quick cash.

Buoying spending, annual immigration growth accelerated to the highest in more than two years in May. Consumers’ pessimism about their future wealth has fallen to the lowest level since February last year, according to a Roy Morgan Research poll taken in the two weeks ended July 5.

House prices were unchanged in June from a year earlier — the first time in 15 months values hadn’t declined, the Real Estate Institute said last week. House sales rose 40 percent from a year earlier.

Retail sales increased in 14 of the 24 store categories measured in today’s report, led by a 2.2 percent gain in supermarket and grocery sales, which make up one-fifth of all retailing.

Monthly Sales

The monthly sales series isn’t adjusted to exclude price movements and sales. Grocery food prices rose 1 percent in May, according to government figures.

Clothing store sales surged 13 percent as plummeting temperatures and above-average rainfall boosted sales of winter clothes, the statistics bureau said. Appliance sales also gained.

“The cold snap sent shoppers indoors to the mall and boosted clothing sales,” said ASB’s Turner.

Pumpkin Patch Ltd., the nation’s second-largest retailer by market capitalization, last month said trading at its children’s clothing stores, was “reasonably robust.”

Vehicle dealer sales fell for the first time in three months, dropping 1.9 percent. Purchases from fuel outlets declined 2.7 percent.

The core retail trend series, which excludes irregular movements as well as seasonality, rose 0.2 percent from April.

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Russia’s central bank cut its main interest rates for the fourth time in less than three months after the economy contracted 10.2 percent through May and government spending failed to reverse the decline.

Bank Rossii cut the refinancing rate to 11 percent from 11.5 percent and the repurchase rate charged on central bank loans to 10 percent from 10.5 percent effective July 13. The bank cut rates for the first time since 2007 on April 24 and again on May 13 and June 5.

“Despite the ongoing rate cuts conducted by Bank Rossii in April to June 2009, interest rates remain high,” the bank said in a statement. The latest reductions will lower borrowing costs and lead to the “restoration of lending activity of the banking sector.” The average rate in May for one-year loans for non- financial companies was 15.9 percent, the statement said.

The key interest rates of the world’s biggest energy exporter are among the highest in emerging markets, while its economic contraction is one of the steepest. Policy makers aim to spur lending and help pull the country out of its first recession since 1998.

Industrial production slumped a record 17.1 percent in May and capital investment shrank the most since December 1998, dropping an annual 23.1 percent. Inflation last month slowed to an 18-month low of 11.9 percent from 12.3 percent in May.

‘Small Step’

Previous cuts failed to revive lending, First Deputy Chairman Alexei Ulyukayev said in an interview last month. Lenders aren’t passing on the lower rates to companies on concern slumps in manufacturing and consumer demand may trigger a second wave of problems as companies fail to repay loans.

Lending to companies fell 1.5 percent in May compared with the previous month, while retail loans dropped 1.9 percent, the central bank said this week. Overdue bank loans reached 4.6 percent of the total in May, versus 4.2 percent a month earlier.

“It’s a small step toward reanimating lending,” said Stanislav Ponomarenko, a fixed-income analyst at ING Groep NV in Moscow. Rates need to be cut by as much as 4 percentage points to have an effect on lending, he said.

The central bank will watch the inflation rate as well as lending patterns and financial and currency markets as it sets its policy on rates in the future, the statement said.

‘Momentous Shift’

Consumer-price growth is slowing “intensively” and the inflation rate will be significantly less than the government’s original forecast, allowing the bank to continue cutting rates, Chairman Sergey Ignatiev told Russia’s parliament on June 24 business

Leaders of developing countries confronted advanced nations with a demand for a greater role in the management of the global economy, signaling the drift in power away from the financially distressed West.

Five countries with almost half the world’s population — China, India, Brazil, Mexico and South Africa — challenged the hegemony of the U.S. dollar, balked at the industrial world’s strategy for fighting climate change and sought more clout in global markets and institutions.

The encounter yesterday in L’Aquila, Italy at the annual Group of Eight summit dramatized the ascendance of emerging nations — led by China — as the worst economic calamity since World War II batters the U.S. and its European allies.

“Everyone was of the opinion that the G-8 isn’t any longer the most ideal structure for dealing with the governance of the world economy,” Italian Prime Minister Silvio Berlusconi told reporters after chairing the session.

Leaders of the G-5 — representing 3 billion people with gross domestic product of $7 trillion — appeared as a united front for a fifth time at the summit of the G-8, the advanced world’s forum founded in 1975.

“What is happening here is simply the acknowledgment of a reality,” Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said in a Bloomberg Television interview. “Be it the fight against poverty, climate change, trade — whatever you want that is global in nature — you need those large emerging economies.”

Climate Clash

The eight — the U.S., Japan, Germany, Britain, France, Italy and Canada, along with Russia, a member since 1998 — unite 880 million people with combined GDP of $32 trillion.

Russia, which has joined Brazil, India and China in the BRIC bloc, views the G-8 as a forum for “brainstorming,” said Sergei Prikhodko, an aide to President Dmitry Medvedev. “It’s too early to talk about burying the G-8.”

The G-5 took aim at the advanced economies’ call for a 50 percent cut in greenhouse-gas emissions by 2050, saying the policy would suppress the economic growth needed to lift millions out of poverty. No target can be set until world climate talks wrap up in December, they said, insisting on money and technology to help clean up the atmosphere.

“While we don’t expect to solve this problem in one meeting or one summit, I believe we’ve made some important strides,” President Barack Obama said.

Growth Gap

The contrast was highlighted July 7 when the International Monetary Fund said developing countries are leading the way out of the economic morass spawned by the industrial world.

Emerging economies led by China will expand 4 car loan interest rates.7 percent next year, the IMF said, up from an April prediction of 4 percent. The Washington-based lender forecast growth of 0.6 percent in the advanced economies, up from expectations of stagnation.

China is “better situated to deal with this crisis,” billionaire investor George Soros said in a Bloomberg Radio interview July 7. “The Chinese in my opinion are going to gain in power and influence in a way that people currently don’t recognize.”

In a statement in L’Aquila, the G-5 warned the industrial world against backsliding on aid commitments and sought “a new global governance,” including better representation in the IMF and United Nations.

After parallel summits July 8 in a region rebuilding from an earthquake in April, the G-8 and G-5 met yesterday to work out a statement to at least paper over the diverging worldviews.

Dollar Dispute

Central to their dispute is the status of the dollar, its role as the world’s dominant reserve currency under threat from the $2.3 trillion in debt run up by the U.S. since the start of 2008 to stem the financial crisis.

The G-5 — mainly China — held around $1 trillion in U.S. Treasury debt in April, giving them leverage over decisions made in Washington.

While officials from China, Russia, India and Brazil grumbled outside the conference room about the dollar’s hegemony, there was “not a serious discussion” of currencies on the inside, U.K. Prime Minister Gordon Brown said.

“There has been concern on the dollar, but there hasn’t been a coherent strategy put forth,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “We don’t think that’s going to be an issue weighing on the dollar for the balance of this year. It’s a much longer term issue.”

Brazilian and Russian officials said they intended to raise the issue at a G-20 meeting in Pittsburgh in September. The dollar “may well be” brought up there, Brazilian Foreign Minister Celso Amorim said. Arkady Dvorkovich, Medvedev’s economic aide, said currencies are a G-20 matter.

Hu’s Absence

Chinese President Hu Jintao didn’t need to show up in L’Aquila to project his influence. The Chinese leader hustled back to Beijing before the summit started to deal with ethnic disturbances along China’s western border, leaving State Councilor Dai Bingguo as a representative.

“Hu’s absence ironically demonstrated China’s presence,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo.

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The Bank of Korea left its interest rate unchanged at a record low for a fifth month today, saying it will keep an accommodative policy as the economy recovers from the global recession.

“South Korea’s economy and the global economies may improve next year, but it seems that it’ll be hard for global trade to recover in a short time,” Governor Lee Seong Tae told reporters in Seoul after he held the seven-day repurchase rate at 2 percent.

The central bank follows counterparts in Australia and Europe, which both kept borrowing costs at historic lows in the past week to support their economies. The International Monetary Fund and Goldman Sachs Group Inc. this week upgraded forecasts for the South Korea’s gross domestic product in 2009, citing stimulus from rate cuts and government spending.

“Governor Lee has made it clear that the central bank will leave rates unchanged at least through the end of the year,” said Oh Suktae, an economist at Citigroup Inc. in Seoul. “The bank may raise rates early next year when there are more visible signs of a solid recovery.”

Today’s decision was expected by all 15 economists surveyed by Bloomberg News.

Leaders from the Group of Eight nations said yesterday the global economic pickup from the steepest recession since World War II was too fragile for them to consider reversing efforts to pump money into the economy. The group includes the U.S., Germany and Russia.

Shares Gain

South Korea’s Kospi stock index rose 0.4 percent to 1,437.03 at 1:57 p.m. in Seoul today. The index climbed 15 percent in the three months ended June 30, the most since the second quarter of 2007. The won fell 0.1 percent to 1,277.57 against the dollar.

Policy makers “will maintain an accommodative policy stance for the time being,” the Bank of Korea said in a statement today. Governor Lee said the board needs to take a “cautious stance” on interest-rate decisions because growth may be weak in the second half.

The bank reduced the benchmark rate by 3.25 percentage points between October and February, the most aggressive easing since it began setting a policy rate a decade ago.

South Korea joined India, China and Australia as one of the few major economies to grow in the first quarter, with GDP expanding 0 no teletrack payday loans.1 percent from the previous three months. Consumer confidence jumped to the highest in almost two years in June.

Export Recovery

Exports, which are equivalent to 50 percent of GDP, gained 17 percent in June from May to an eight-month high. The won has fallen 27 percent versus the dollar since the start of last year, boosting overseas earnings for exporters.

Samsung Electronics Co., the world’s second-largest chipmaker, said this week that second-quarter operating profit probably jumped more than fivefold from the previous quarter.

South Korea’s “rapid and comprehensive fiscal, monetary and financial policy response helped limit the depth of the downturn,” the IMF said on July 7. “With little inflationary pressures, the current stance would need to be maintained until a self-sustained recovery is clearly established.”

Economists are debating when the central bank will begin to unwind its interest-rate cuts.

Kwon Young Sun, an economist at Nomura Holdings Inc., said last week he expects the bank to raise borrowing costs in November, because keeping rates low for too long could fan excessive borrowing and stoke an asset-price bubble.

Governor Lee said today the bank is monitoring a “big” increase in mortgage lending and a pickup in real estate prices.

Bank lending to households expanded in June by the most in more than two years on increased demand for mortgages.

The financial regulator said this week it will tighten loan regulations for people purchasing homes in the capital Seoul and surrounding areas to stem a surge in borrowing.

“The economy is recovering faster than we expected thanks to a good mix of strong fiscal stimulus, a weak Korean won and monetary easing,” said Kwon Goohoon, an economist at Goldman Sachs in Seoul. A rate rise may come “as early as in the first quarter of 2010, but the tightening cycle will likely be slow.”

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European Union finance ministers said it’s too soon for governments to reverse stimulus measures as the region’s economy struggles to pull out of the worst recession since World War II.

“We haven’t reached the time yet at which the exit strategy could be applied. We’re still in the middle of the crisis,” Luxembourg Finance Minister Jean-Claude Juncker said after leading a meeting of euro-area counterparts in Brussels late yesterday. EU Monetary Affairs Commissioner Joaquin Almunia said “this is not the moment” to remove the stimulus.

The remarks reinforce the view of the Organization for Economic Cooperation and Development that the euro area will be mired in a recession for the rest of the year. The Paris-based group cut its 2009 forecast for the region last month, even as it raised its outlook for the global economy for the first time in two years.

Juncker said the global financial turmoil may cut potential output in the euro area from 2.2 percent to less than 1 percent from 2009 to 2010. The decline “will be all the greater if the determined collective measures of governments are not strong enough,” he said.

While it may not be time to withdraw stimulus, officials still need to start discussing plans as a “clear exit strategy” will help confidence, said Almunia, who attended the meeting of finance ministers.

‘Not So Easy’

Other finance ministers also said that risks to growth remain. Spain’s Elena Salgado said that a return to growth this year “is not so easy to achieve,” though some signs of recovery will emerge and expansion will resume in 2010.

Earlier this month, European Central Bank President Jean- Claude Trichet said that economic activity this year “is likely to remain weak, but should decline less strongly than was the case in the first quarter.”

Both Juncker and Almunia downplayed the threat of deflation in the euro area, where consumer prices fell 0 cash advances.1 percent in June, recording their first annual decline. The ECB aims to keep inflation just below 2 percent.

“Over the medium term, we’ve got inflation solidly anchored around the ECB’s forecast,” Almunia said. “The majority of the prices within the price basket will continue to grow. We believe also that wage trends do not suggest that deflation is just around the corner.”

OECD Outlook

The ECB started buying 60 billion euros ($84 billion) of covered bonds yesterday, its latest effort to ease credit tensions and encourage lending, after leaving its benchmark interest rate at a record low of 1 percent earlier this month.

While European economic confidence rose to the highest in seven months in June, and a measure of manufacturing is also improving, unemployment is continuing to rise, which will weigh on consumer spending.

The OECD sees the euro-region economy shrinking 4.8 percent this year, it said on June 24, cutting a March forecast for a 4.1 percent contraction. At the same time, it said the combined economy of its 30 member nations will shrink 4.1 percent this year and grow 0.7 percent in 2010, compared with a previous projection for contractions of 4.3 percent and 0.1 percent.

Officials’ efforts to staunch the slump are weighing on public finances and have pushed some countries over the EU’s deficit limit of 3 percent of gross domestic product. Ministers will set a timeframe today for Hungary, Lithuania and Poland to bring their budget gaps to within the limit, having already set deadlines for Ireland, France, Spain and Greece.

“Lower potential growth and a lower output gap will constrain the room for maneuver for our fiscal policies in the near future,” Almunia said. Officials should aim “not to create further imbalances when designing how to get out of this crisis.”

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The European Central Bank will keep interest rates at a record low for more than a year and may yet need to expand its use of unconventional tools as it battles the worst recession since World War II, economists said.

ECB officials meeting in Luxembourg today will leave the benchmark rate at a record low of 1 percent, according to all but two of 60 economists in a Bloomberg News survey. The central bank, led by President Jean-Claude Trichet, may keep the rate there until the fourth quarter of 2010, a separate survey shows.

The ECB last week lent banks a record 442 billion euros ($621 billion) for 12 months at its key rate in the hope they will pass on cheaper credit to companies and households. It will also start buying 60 billion euros of covered bonds this month to encourage lending. Trichet may today unveil further details of the plan, which was a compromise after policy makers failed to agree on a package twice that size.

“The ECB is pretty much done with cutting rates,” said Guillaume Menuet, an economist at Bank of America-Merrill Lynch in London. “However, they are very concerned about credit developments. If there is no improvement by October, the debate about expanding the asset purchases will resurface.”

The ECB, which holds Governing Council meetings twice a year away from its Frankfurt headquarters, announces its rate decision at 1:45 p.m. and Trichet holds a press conference 45 minutes later.

Close to Zero

The central bank for the 16-member euro region has been reticent to follow the examples of the U.S. Federal Reserve, Bank of England and Bank of Japan, which have lowered their main rates to close to zero and are buying government and corporate bonds to reflate their economies.

The ECB, whose key rate is still the highest among the Group of Seven nations, has focused instead on getting credit flowing through the banking system again, arguing that two thirds of its economy is financed by banks.

Even so, loans to households and companies in the euro area grew at the slowest pace on record in May as the recession crimped demand for debt and prompted banks to tighten credit standards.

While the ECB’s measures have stabilized the banking sector, “they have not, at this stage, succeeded in pushing credit into the real economy,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London instant payday loan. That could be achieved by buying corporate bonds, he said.

Original Plan

The ECB initially considered a package of asset purchases worth 125 billion euros that included corporate bonds and commercial paper, according to people briefed on the talks. Germany’s Axel Weber opposed buying assets of any sort. Other ECB officials, such as Athanasios Orphanides from Cyprus, have said more may need to be done to temper the risk of deflation.

Consumer prices fell 0.1 percent in June from a year earlier. That’s the lowest inflation rate Europe has seen since 1953, according to Royal Bank of Scotland. The ECB predicts the euro-region economy will contract about 4.6 percent this year.

“The primary goal should be to restore economic growth as fast as possible,” ECB council member Ewald Nowotny said at a conference on June 16. “It is necessary to use all possible means to secure a recovery,” he said in a June 19 interview, adding he expects interest rates to stay on hold into 2010.

Inflation Concern

Some policy makers are more worried that the stimulus being provided by central banks and governments will sow the seeds of future inflation. Deflation risks “are extremely limited,” ECB Executive Board member Juergen Stark said June 25. The bank will “swiftly” withdraw additional liquidity when the economy improves, he said.

There are signs that the worst of the recession may be over. The contraction in Europe’s services and manufacturing industries is slowing and confidence in the economic outlook rose to a seven-month high in June.

“The economy certainly won’t prompt any more ECB action for now,” said Aurelio Maccario, chief euro-area economist at Unicredit Group in Milan, who expects the ECB to keep rates on hold until the end of 2010. “However, if credit flows don’t start improving, Trichet will have to put his thinking cap on again in a few months.”

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