BRUSSELS Europe's indebted Mediterranean region has begun to show signs of competitiveness by boosting exports, contributing to a strong euro zone trade surplus in the first eight months of this year.
Eurostat released the trade data on Tuesday separately from figures showing euro zone September inflation stayed stubbornly high at 2.6 percent on an annual basis, with clothing, energy and food prices rising despite the bloc's shrinking economy.
Some economists said there may still be room for a European Central Bank interest rate cut in coming months, although it is more intent now on improving the pass-through of low official rates to borrowers throughout the 17-nation currency bloc.
For now, an improving trade balance may offer the euro zone its best route to recovery, as exports gain ground.
The euro zone's trade balance in the first eight months of this year swung to a 46.9 billion euro surplus from a 26.8 billion euro deficit in the same period a year ago, most of which was delivered in the June-to-August period.
"The improvement is gaining steam," said Dominique Barbet, a senior economist at BNP Paribas. "It is vital that recovery continues ... exports are the only source of economic growth available for peripheral Europe," she said.
Countries such as Greece, where the debt crisis erupted three years ago, are highly dependent on oil imports, but in a sign that Europe's contentious austerity policies may be bearing some fruit, exports grew and imports fell in Greece, Italy and Spain in the first seven months of this year.
Italy moved to a trade surplus of 4.4 billion euros in the January-to-July period from a deficit in the same period a year ago, while Greece's exports jumped 12 percent. Spain saw export growth of 2 percent in the period, while imports fell 3 percent.
Wage cuts after a decade of a credit-fuelled boom have been painful for millions of southern Europeans, but by toughing it out, they are becoming more competitive as the cost of labor falls - what policymakers call "internal devaluation".
INFLATION LOWER THAN FORECAST
Consumer prices in the 17 countries sharing the euro rose 2.6 percent in September on an annual basis - the same level as August, Eurostat said, although lower than the 2.7 percent rise economists polled by Reuters had forecast.
Some economists now think inflation has peaked after a spike in August, which would be good news for European households struggling with record unemployment, wage cuts and the euro zone's second recession in just three years.
Economists still expect inflation to remain above the European Central Bank's target of close to 2 percent until the middle of next year, but after cutting out energy prices, core inflation at 1.5 percent in September looks more stable.
"The ECB has very little room to move on rates, but we expect them to go to 0.5 percent by the end of the year," said Francois Cabau, an economist at Barclays in London.
"Headline inflation will remain above the ECB's target, but the core will be below that, and that is what the ECB is probably more looking at when deciding on medium term inflation pressures," he said.
Further cuts to the cost of borrowing seem difficult to justify when inflation has been above the bank's target for almost two years.
A slim majority of economists see the ECB holding rates at 0.75 percent until the end of the year, according to a Reuters poll. But most expected the Frankfurt-based bank will cut rates by the end of the first quarter of 2013.
"Euro zone inflation is probably going to show a very gradual descent," said Martin van Vliet, an economist at ING. "We still anticipate a 25 basis point cut in the refinancing rate to 0.5 percent around the turn of the year," he said.
A rate cut was not even discussed at the ECB's last Governing Council meeting and investors' focus is on the bank's new bond-buying programme that allows it to buy short-term bonds on the secondary market after countries ask the euro zone's permanent bailout fund to buy their debt on the primary market.
But with the International Monetary Fund forecasting a 0.4 percent contraction in the euro zone's economy this year and very modest growth in 2013, there is an economic rationale to cutting the cost of borrowing for companies and households.
Very weak domestic demand is at the heart of the euro zone's slump, with consumer spending driving half of the bloc's economic output. ($1 = 0.7730 euros)
(Reporting by Robin Emmott; editing by Rex Merrifield and Stephen Nisbet)