Tuesday, July 24, 2007

Quick Check-up on the Eurozone

by Claus Vistesen

Cross posted from Alpha Sources

As the header suggests this is small update on the recent news we have out on the Eurozone. First of all we have the industrial orders which showed a rebound in May and although this constitutes somewhat of a backward looking glance at this point. However, the fact that industrial orders are not on a secular decline shows that capex might keep momentum longer than expected. All big member countries saw respectable growth both on a monthly and a yearly basis. Also in France did we get some welcome news from a key domestic indicator as household consumption rose in June after a slump in May ...

French consumer spending on manufactured goods grew more than twice as much as expected in June as unemployment fell in Europe's third-largest economy.

Such spending, which accounts for about 15 percent of the economy, jumped 1.6 percent from May, when it fell a revised 1 percent, Insee, the Paris-based national statistics office, said today. It was the biggest gain since August and beat the 0.7 median forecast of 30 economists in a Bloomberg News survey.

Household spending is rebounding after France's jobless rate fell in May to 8.1 percent, the lowest since June 1982, and as new President Nicolas Sarkozy pledges to boost the economy by loosening firing rules and cutting taxes by 13 billion euros ($18 billion).

However, this also marks the end of the good news on the Eurozone and in Italy consumer confidence stayed at a one year low in June which does not at all bode well for Q2 - Q4 GDP.

Italian consumer confidence remained near a 14-month low in July, as rising interest rates and higher gasoline costs left families with less money to spend.

The Rome-based Isae Institute's index, based on a poll of 2,000 households, rose to 107.4 from 107.2, which was the lowest since May of last year. The July reading was less than the median forecast of 108 by 20 economists surveyed by Bloomberg News.

``Interest rates, a strong euro and oil prices have all been overlooked a bit given the strong demand we've had in the past, so they may be finally starting to weigh on spending,'' said Ilaria Spinelli, an economist at Fideuram Investimenti Sgr in Milan.

Italians have seen their disposable income shrink after the highest interest rates in six years and a jump in energy costs erode what consumers have to spend. Gasoline prices in Italy have increased more than 12 percent this year and that gain is weighing on confidence as the summer driving season begins.

And finally we have the latest aggregate data on manufacturing and services which furthermore posted a decline in July. The decline was no means dramatic but it does suggest as I have been previously arguing here that the latter part of 2007 might look somewhat differently from the former.

Growth in Europe's manufacturing and service industries, which account for two thirds of the economy, slowed more than economists expected in July as the euro rose to a record and oil prices increased.

Royal Bank of Scotland Group Plc's combined index, spanning industries from autos to banking and airlines, fell to 57.3 from 57.8 in June, Reuters Plc reported. Economists expected the composite index to slip to 57.6, according to a Bloomberg News survey. A reading above 50 indicates expansion.

The euro's surge to a record against the dollar and the yen is eroding the competitiveness of European exports, the mainstay of economic growth over the past two years. Rising oil prices may also sap domestic spending and cool an economy that last year grew at the fastest pace since 2000.

Whether all this will trickle through to Frankfurt remains to be seen but at this point it seems as if inflation is still the biggest bogey man for the ECB. In FX land, the US subprime woes weighed heavier on the EUR/USD than the mildly negative data stream from Europe although the Dollar paired the decline during the day.

Well, since I wrote this there have been some other indicators out on the Eurozone which deserves mention. The general picture conform with the view that growth might now be slowing somewhat in the Eurozone although the news was not entirely on the downside.

First off in France, business confidence stayed at its high level from last month ...

French business confidence remained near a six-year high in July as falling unemployment spurred consumer spending, suggesting growth is accelerating in the second half.

Insee, the Paris-based national statistics office, said today its index of sentiment among 4,000 manufacturers was unchanged at 110 in June. The confidence measure held at its second-highest level since the first quarter of 2001 after reaching 112 in April, and was in line with the median forecast of 29 economists in a Bloomberg survey.

In Germany on the other hand business confidence declined for a second consecutive month ...

German business confidence fell for a second month in July as the euro's gains and rising oil prices threaten to curb growth in Europe's largest economy.

The Munich-based Ifo research institute said its sentiment index, based on responses from 7,000 executives, fell to 106.4 from 107 in June. That's in line with economists' median estimate in a Bloomberg News survey. The index has averaged 96 since records for a reunified Germany began in 1991. It reached a record of 108.7 in December.

However, consumer confidence stayed upbeat in Germany although consumers are growing somewhat anxious on a relative basis regarding income expectations. Yet, the ever improving labour market is still the main driver of sentiment it seems.

Consumer confidence in Germany, Europe's largest economy, rose to an eight-month high after unemployment declined to the lowest level in 12 years.

GfK AG's confidence index for August, based on a survey of about 2,000 people, rose to 8.7 from 8.5 in July, the Nuremberg- based market-research company said today. Economists expected a gain to 8.8, according to the median of 25 forecasts in a Bloomberg News survey. The July reading was revised up from 8.4.

German households are growing more optimistic as companies increase capacity and hire more workers to meet orders. Still, business and investor confidence fell in July, suggesting economic growth is slowing from the fastest pace since 2000.

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