Saturday, May 31, 2008

EU Economic Sentiment Indicator May 2008

After a drop in April, the Business Climate Indicator (BCI) has stabilised in May. The Economic Sentiment Indicator (ESI) remained unchanged in the Eurozone at 97.1.

The downward trend of the BCI and the deceleration in industrial production registered in March point to a weakening of industrial activity in the second quarter of 2008.

The increase in the BCI is mainly due to an improvement in industry managers' appraisals of the production trend in recent months. Managers' assessments of their export order books deteriorated slightly, while their production expectations and their views on total order books and stocks of finished products remained unchanged.

Economic sentiment decreases further in the EU and remains stable in the Eurozone

In May, the Economic Sentiment Indicator (ESI) decreased further by 1.3 points to 96.7 in the EU and remained unchanged in the Eurozone at 97.1. In both regions, the ESI stands below its long-term average.

There is also increasing evidence of a widening divergence between the big four economies in the 15-nation currency bloc with Germany and France continuing to prop-up a contracting Italy and a Spain which is in "free fall". This divergence is only going to add to the headaches over at the European Central Bank, which is already pretty worried about the continuing high inflation.

The decrease in the sentiment indicator for the EU is due to lower confidence in manufacturing and construction and among consumers, while confidence in retail trade improved and remained stable in services. In the Eurozone, sectoral developments were somewhat different, with confidence remaining stable in manufacturing, decreasing among consumers and improving in services, retail trade and construction.

German Retail Sales April 2008

According to provisional results of the Federal Statistical Office turnover in the German retail trade in April was up by 1.5% in nominal terms and in down by 1.0% real terms over the corresponding month of the previous year. The number of days open for sale was 26 in April 2008 and 23 in April 2007. Basically Easter makes a bit of a mess of the April/March comparison, but there is no doubt that over the two months retail sales were down significantly over the same months in 2007.

When adjusted for calendar and seasonal variations, the April turnover was in nominal terms 1.3% and in real terms 1.7% smaller than that achieved in March. Compared with the corresponding period of the previous year, retail turnover was in the first four months 2008 in nominal terms 1.6% larger and in real terms 0.9% smaller than that in the first four months of 2007.

What is clear is that retail sales are falling in Germany, and that they have been since 2006. The index of 2006 was 103.8, that for 2007 was 101.5 (a decline year on year of 2.2%), while in April 2008 the index stood at 98.7.

What it might well be worth considering given the declining working age population issue which is soon to lock in in Germany is whether we may not have reached a high point of the retail sales index in 2006 which will simply not be achieved again, in constant price terms. After all, the export driven boom of the last couple of years is certainly not going to be easily repeatable in the near future, and yet during much of this retail sales have continued to fall in real terms.

Having said this, we should never imagine life is entirely a one way street, and we do have quite an interesting and hard to interpret Retail Sales Purchasing Managers Index reading for May (this is a kind of early warning reading).

Having fallen sharply in April, German sales bounced back in May, showing the largest monthly gain since November 2006. The index jumped from 44.6 to 56.6. The turnaround was commonly attributed by panelists to improved sales of seasonal clothing and household goods resulting from improved weather. Looking back at the index, and the data in recent months (not to say years) it is hard to see the May reading as anything more than temporary "bounce" following several months of quite weak readings.

Eurozone Retail PMI May 2008

The latest reading on the Bloomberg Eurozone Retail Purchasing Managers' Index (PMI) suggests that European retail sales rose in May at the fastest rate since April 2007, and registered the first increase for three months.

The Bloomberg Eurozone PMI, an indicator based on a mid-month survey of economic conditions in the euro area retail sector and providing data one month ahead of government issued figures, registered 53.1 in May, suggesting a significant bounce-back from April's survey low of 41.8. The improvement reflected higher sales of clothing & footwear, food & drink and household goods, commonly attributed to better weather compared to April and to the timing of Easter.

However, despite the pick-up during May, sales have fallen over the first five months of the year on average, suggesting that business conditions in the Eurozone retail sector are generally subdued. Also, due to the very early timing of easter this year, and some very untypical weather, it is hard to interpret the month on month readings. If we add the two readings - April and May - together, and halve the result, we get 47.45, which means on average there was contraction across both months.

In May sales rose in Germany and France but fell in Italy.

Having fallen sharply in April, German sales bounced back in May, showing the largest monthly gain since November 2006. The index jumped from 44.6 to 56.6. The turnaround was commonly attributed by panelists to improved sales of seasonal clothing and household goods resulting from improved weather. Looking back at the index, and the data in recent months (not to say years) it is hard to see the May reading as anything more than temporary "bounce" following several months of quite weak readings.

French retail sales showed a stronger rise in monthly sales than Germany, posting a sharp increase and a reversal from the decline recorded in April. The index leapt from April's twenty-seven month low of 46.2 to hit a twenty-three month high of 59.6 in May.

Italian retail sales fell for the fifteenth successive month. Although the rate of decline slowed from April's record pace (the index rose from 31.4 to 38.8), the last three months have seen the three sharpest falls in sales seen over the survey's four-and-a-half year history. Consumers remained reluctant to spend due to squeezed incomes and concerns over the economic and political environment.

Sales Component

Eurozone retail sales registered the strongest year-on-year increase for thirteen months in May. Having hit a record low of 35.7 in April as poor weather and the timing of Easter hit sales compared to a year ago, the year-on-year sales index climbed to 56.1 in the latest period. Strong recoveries were registered in both Germany and France in May, with the latter seeing the sharper rate of increase, but sales continued to fall on an annual basis in Italy. However, over the first five months of the year on average, retail sales across the Eurozone have run marginally below the level seen a year ago.

Sales by sector

Having seen the sharpest year-on-year fall in sales for over two years in April, food & drink retailers reported a record increase in May. Similarly, sales of clothing & footwear showed the first rise for eight months and sales of household goods rose for the first time since last June as improved weather spurred demand for new season's ranges, helping to counter record falls in both sectors in April. The pharmaceuticals sector also saw an increase in sales on a year ago -- the first such rise for four months -- leaving autos & fuel as the only sector to see a decline in year-on-year sales in May.

Prices and margins

Prices paid for goods by retailers rose at a rate just below the record pace seen last November. The prices index rose from 66.5 to 68.3. All three countries saw steep rises in average purchase prices, with German retailers again registering the strongest rate of inflation. That said, it was in Italy that the most marked acceleration in price inflation was seen, with the rate of increase hitting a new record high. By sector across all countries, the overall acceleration in price inflation was driven by the auto & fuel sector, where prices paid for inputs hit a record high (reflecting high oil prices). Food & drink retailers nevertheless again registered the sharpest overall rise in prices while clothing & footwear saw the weakest rise.

Retailers' margins deteriorated again in May, mainly due to rising purchase costs. The margins index rose from April's record low of 39.0 to reach a three-month high of 43.0. Italian retailers reported by far the sharpest deterioration in margins while retailers' profits were squeezed to the weakest extent in Germany.
Sales against targets -- targets missed by smallest margin for thirteen months
Despite the marked improvement in sales performance compared to one month earlier, retail targets were missed again in May. However, the index of actual sales relative to planned sales rose from April's near four-year-low of 31.2 to 45.2, indicating the smallest shortfall in sales against targets for thirteen months. Targets were missed very narrowly in both Germany and France, though this was partly offset by a marked shortfall in Italy. By sector across all countries, targets were missed for all sales categories with the exception of food & drink. Of note, a marginal drop against targets was seen for clothing & footwear. Targets were missed to the greatest extent in the autos & fuel sector.

Expected sales against targets next month

Retailers remained confident of beating targets in June, though they were less optimistic than a month ago. The expectations index fell from 59.1 to 56.9. French retailers were again by far the most optimistic. Expectations of beating targets rose to a six-month high in Italy, although the level of confidence remained the weakest of the three countries. Sales are expected to beat targets across all product sectors in May except household goods. The greatest optimism was seen in the food & drink sector, followed by clothing & footwear.


Retail employment fell marginally for the second month running in May (the index registered 49.9 from 49.5 in April) as firms sought to cut staff costs in the face of rising wholesale prices and consumer caution. A modest increase in German retail employment was accompanied by almost no change in France and a fifth successive monthly decline in Italy.

Retailers' buying and stock trends

Purchases of goods for resale by retailers rose very modestly in May, following a marked fall in April. The index of purchases improved from 46.1 to 50.7. The latest expansion was largely driven by increased purchasing in France, while a far more muted increase was seen in Germany. Purchasing fell sharply again in Italy. Meanwhile, the level of unsold stock in the Eurozone retail sector continued to build up. The expansion was faster than in April, albeit below the record pace seen in April 2006. The stocks index moved up from 53.6 to 55.6. Inventories rose in all three countries, led by France.

Friday, May 30, 2008

Spain Inflation and Producer Prices May 2008 (Flash Estimate)

The rate of inflation as measured by Spain's consumer price index was up again in May, at 4.7% according to the flash estimate, while the producer price index rose at a 7.2% annual rate in April according to the latest data from the National Statistics Office (INE). This situation is now most difficult since the economy is evidently slowing rapidly (see the most recent retail sales, industrial output and new mortgages data which are in the posts which accompany this one) yet inflation is actually accelerating. Spain is now entering a period of very pronounced stagflation with little certainty over the likely short term evolution of this whole situation. ie things are obviously going to get worse, but how much worse and how rapidly, and when the inflation eventually buckles under the weight, what will then happen to prices if the euro remains strong? As I say, a lot of unknowns here.

Consumer Inflation

The HICP annual inflation is expected to be 4.7% in May 2008, according to the flash estimated issued by the INE. This index provides a preview of the HICP that, if confirmed, would imply a five-tenths increase on the annual rate, since in April this change was 4.2%. The INE issues this indicator with the aim of incorporating it into the calculation of the HICP flash estimated of the European Monetary Union (EMU) published by Eurostat. Obtaining this EMU flash estimated forms part of the Eurostat and European Central Bank policy of offering timely and quality data that is comparable with that produced by the United States.

Producer Prices

In April, the Spanish Producer Price Index registered a 0.8% increase with respect to the month of March 2008 and an increase of 7.2% with respect to April 2007. The activities that most influenced this variation were Manufacture of coke and refined petroleum products (28.8%) and Food and beverage products industry (10.5%). By economic destination of the goods, the variation rates as compared with the same month the previous year were 5.3% for consumer goods (3.2% for durable consumer goods and 5.5% for non-durable consumer goods), 2.2% for capital goods, 6.0% for intermediate goods and 16.5% for energy.

Thursday, May 29, 2008

German Unemployment May 2008

German unemployment unexpectedly rose in May for the first time in more than two years as record oil prices and the euro's appreciation weighed on exports. The figures however do need to be treated with caution, since computer glitches at the labour office, the reclassification of some categories of unemployed and the simple fact that Easter was in March and not April have all, to some extent, been playing around with the data.

The number of people out of work, adjusted for seasonal swings, rose 4,000 from April to 3.31 million (although the unadjusted number was still down a bit - see chart below) according to the Nuremberg-based Federal Labor Agency today. Up to May unemployment had fallen every month since January 2006.

With oil close to a record and the euro's 16 percent increase against the dollar in the past year making exports of goods like cars less competitive, companies may well be becoming more reluctant to hire workers. The European Central Bank has indicated its unwillingness to lower interest rates while inflation and money supply continue to surge strongly in the 15 country eurozone.

Exports unexpectedly fell for a second month in March as a global slowdown and the rising euro weighed on orders, according to the Federal Statistics Office in their monthly report.

In Europe, Germany's main export market, service and manufacturing industries expanded at the slowest pace in five years in May, according to the PMI flash estimates.

Data from NTC Economics gave a preliminary estimate for the Eurozone services PMI which slumped to 50.6 in May from 52.0 in April, way below forecasts for a much more moderate fall to 51.8. The level equals January's four and a half year low and takes the index closer to the 50 level below which the index would be indicating a contraction in activity. The equivalent index for manufacturing dropped to 50.5 from 50.7, slightly above forecasts, which were expecting a slightly weaker reading of 50.4, but still marking the lowest reading since August 2005.

The flash Purchasing Managers Index for Germany's service sector fell to 53.7 in May from 54.9 in April, while in the manufacturing sector activity dipped to 53.5 from 53.6 a month earlier. So basically we have the impression that things are slowing all round.

However, Frank Weise, head of the Federal Labour Agency which released the employment figures, warned that this months drop in the rate of employment creation “should not be interpreted as the first sign of a slowdown in the labour market.”

The agency said statistical effects and changes in the law also played their part. The seasonally-corrected figures, it said, were being distorted by unseasonably warm weather during the winter while changes in the legal status of jobseekers over 58 alone accounted for a 10,000 increase in the number of unemployed.

The mild weather, in particular, meant fewer jobs had been lost during the winter than in previous years, resulting in a lower reduction in unemployment during the spring season, the agency said. The statistical agency also pointed to employment figures – whose publication lags one month behind the jobless data – showing an 54,000 increase in job creations in April.

As reported by the Federal Statistical Office on the basis of first calculations for April 2008, the number of persons in employment whose place of residence was in Germany was 40.08 million. That was an increase by 650,000 persons (+1.6%) on April 2007. Compared with March 2008, the number of persons in employment rose by 153,000 (+0.4%) in April 2008.

So the positive trend in overall employment creation which has existed in Germany over the last two years certainly continued into April. It is true however that in April the increase in employment was somewhat smaller against the previous year than in earlier months (both in March and February 2008 the rate of increase had been + 1.8% compared with the same month one year earlier). One explanation being offered for this is that particularly favourable employment figures had been recorded for the earlier months (and this is, incidentally, also reflected in the particularly favourable GDP numbers). The mild winter on the one hand and an increased utilisation of the seasonal short-time working allowance on the other will have contributed to this result. The allowance is available only during the period 1 December to 31 March.

In April 2008, the number of persons in employment in Germany was 40.25 million after seasonal adjustment, that is after elimination of the typical seasonal variations. That was a seasonally adjusted increase by 27,000 (+0.1%) on March 2008.

Based on the labour force survey the Federal statistics Office reported a seasonally adjusted 3.19 million unemployed for April 2008. That figure, which is a provisional estimate, was calculated according to the concept of the International Labour Organization (ILO). Compared with the same month a year earlier (April 2007), the number of unemployed was down by 480,000 persons or 13.1%. The seasonally adjusted unemployment rate – which is harmonised across the EU and measured as the share of unemployed in the total labour force – amounted to 7.4% in Germany and was thus considerably below the level of the corresponding month of the previous year (8.5%).

The raw, unadjusted figures showed a 131,000-strong drop in unemployment in May – smaller than the fall observed in May last year - down to a total of 3.28m jobseekers. Internationally comparable figures using International Labour Organisation methodology put the number of jobseekers at 3.39m in April and the unemployment rate at 7.8 per cent.

Wednesday, May 28, 2008

France Consumer Confidence May 2008

Consumer confidence in France dropped to a record low in May after fuel, gasoline and food costs soared. The French consumer sentiment index fell to minus 41, the lowest level since the index was introduced in 1987, from a revised minus 38 in April, Insee, the Paris-based national statistics office, said today.

France's inflation rate fell to 3.4 percent in April after reaching 3.5 percent in March, the highest in at least 12 years. As a result, consumer spending on manufactured goods fell 0.8 percent in April from March, the third drop in four months, Insee reported last week.

Spain Mortgages March 2008

According to data from the National Statistics Office (INE), the value of mortgages constituted on urban buildings in Spain was approximately 16,575 million euros in March, representing a year on year decrease of 36.7%. In housing, the capital loaned exceeded 9,975 million euros, 41.9% less than in March 2007. 105,608 properties were mortgaged in March 2008, a decrease of 37.77% over March 2007.

During the month of March the average amount per mortgage constituted was 164,637 euros, 1.5% more than for the same month in 2007 and 2.8% lower than that recorded in February 2008. In the case of mortgages constituted for housing, the average amount was 141,725 euros, 3.8% less than the same month in 2007, and 4.9% lower than the figure registered in February 2008.

97.9% of the mortgages constituted in March used a variable interest rate, as opposed to the 2.1% that used a fixed rate. Within the variables, the Euribor was the reference interest rate most used in constituting mortgages, specifically in 86.8% of new contracts.

The average value of the mortgages signed in March increased by 1.5% on a year on year basis and reached 164,637 euros. The number of mortgages changing conditions increased by 1.6% and registered cancellations decreased by 33.8%.

Tuesday, May 27, 2008

GFK Consumer Climate Survey May 2008

German consumer confidence fell more than economists forecast in May, as inflation sapped purchasing power. GfK AG's foward looking index for June, based on a survey of about 2,000 people, declined to 4.9 from a revised 5.6 in May.

Rising inflation in May of this year has clouded the mood among consumers. The economic outlook indicator, income expectations and the propensity to buy all suffered considerable losses. As a result, the consumer climate indicator for June is forecasting a value of 4.9 points after a revised 5.6 points in May.

GFK emphasised that with oil and petrol prices constantly hitting new record highs and further looming price increases in areas like food, German consumers are becoming increasingly preoccupied by the constraints on their purchasing power. This has led to income expectations being assessed less positively than in April. Price increase expectations also meant that the propensity to buy fell sharply in May. Concerns about price stability and uncertainty resulting from the crisis on the financial markets and the flagging US economy are currently fueling economic fear amongst German consumers. This has resulted in the economic downturn becoming somewhat more pronounced than at the beginning of the year.

Turning to the sub-components, these are all sharply down this month.

Economic expectations

The significant gains in economic expectations last month could not be maintained in May. The indicator dropped back by almost 10 points to stand at 13.4 points.

GFK suggest that despite the fact the German economy did surprisingly well in the first quarter of the year, German consumers are looking towrads further economic development much more cautiously. It is becoming increasingly apparent that the crisis on the financial market is far from over and the current developments of the US economy while not being disastrous are also far from encouraging in the short term. Evidently, Germans are assuming that the strong GDP growth recorded in the first quarter of 2008 is not likely to continue and as a result, an economic slowdown is being anticipated. The continuing strength of the euro and the high rates of inflation are only intensifying this feeling.

In this light, economically positive developments, such as the good conditions on the job market, are currently taking more of a back seat.

Income expectations

After three months of successive growth, income expectations incurred marked losses in May. The indicator fell by 14.8 points to stand at -4.3 points. As a consequence, the gains made over the previous three months were almost completely negated.

In addition to a general concern about household purchasing power, the particularly high energy prices seem to be a major factor behind the current pessimism concerning future personal finances. Beyond this, discussions of price increases are currently drowning out the positive effects of the wage agreements concluded at the beginning of the year. Positive developments in the job market and the knock-on positive effects for income development are presently being eclipsed by strong inflation expectations.

Propensity to buy

In the wake of falling income and economic expectations, the propensity to buy also suffered major losses in May. The indicator dropped back 15.7 points, to now stand at -20.4 points.

The drop in buying propensity is mainly attributable to the increased fears of inflation. In light of soaring energy and food prices and the fear of further price hikes, any funds allotted to cover these increases can obviously not be used for other purchases.

German GDP Q1 2008 Detailed Results

As already reported here following the first release of data from the Federal Statistics Office on 15 May 2008, the German economy started 2008 with what seemed on the surface to be considerable momentum since on a price, seasonal and calendar adjustmented basis gross domestic product (GDP) was up by 1.5% higher in the first quarter of 2008 over the level achieved in the last three months of 2007.

Economic growth in the first quarter of 2008 was supported primarily by gross fixed capital formation, which continued to increase at a fair clip. Compared with the fourth quarter of 2007, investment in machinery and equipment was up by 4%, and capital formation in construction rose by even 4.5% owing to the comparatively mild winter. Overall final consumption expenditure, increased by 0.5%, the first such rise in over a year, however breaking this down we find that government final consumption expenditure was up markedly (+1.3%), while the final consumption expenditure of households showed a smaller increase (+0.3%) against. Inventory building, on the other hand, added a substantial 0.7% points to growth in the first quarter. Exports continued to grow (+2.4%) but in fact since imports rose even more strongly (+3.5%), foreign trade actually had a downward effect on gross domestic product in Q1 2008 when compared with the preceding quarter (see chart below).

So the bottom line is that the of the 1.5% increase in q-o-q GDP, nearly half (0.7% points) was accounted for by a growth in inventories, while 0.4% was accounted for by a growth in construction which was in part the result of better weather in January and February and scheduled work being advanced (although you can't simply add these numbers since some of the construction work may well have accumulated in inventories), while the net impact of external trade slowed, and household consumption only accounted for 0.2% points.

So basically it would be far from in order to announce this result as strong evidence for anything about the Germany economy at this point, other than that the economy resisted a strong slowdown in Q1. The data from Q2 should make all of this much clearer, I think, we will see what gets to happen to the inventories, and we will see what happens to construction.

Year on year a slight increase (+0.1%) was recorded for the final consumption expenditure of households following a decline in the four preceding quarters (see chart below). According to the statistics office this slight improvement is primarily due to a recovery in private car purchases (follwoing the VAT impact in Q1 2007), since expenditure on transport and communications, which includes also private car purchases, rose by an annual price-adjusted 2.2%.

In the first quarter of 2008, GDP was a price-adjusted 1.8% higher than in the same quarter one year earlier. The growth rate was a calendar-adjusted 2.6% as there had been two working days less in the reference quarter than in the first three months of 2007.

Q1 2008 gross domestic product was achieved by about 39.8 million persons in employment - 686 000 persons or 1.8% more than one year earlier. The number of unemployed (ILO definition) amounted to just under 3.5 million, having a share in the entire economically active population of 8.0%.

Overall labour productivity (price-adjusted gross domestic product per person in employment) rose only very slightly by 0.1% (another bad sign), although as measured per hour worked, there was an increase by 0.8% since the number of hours worked by those in employment rose much less than the number of persons in employment. This is a reflection of how Germany has been creating a lot of part time and temporary work in recent quarters.

Italy Business Confidence May 2008

Italian business confidence rose for the first time in seven months in May after Silvio Berlusconi's victory in the April national election resolved political uncertaintly to some extent and manufacturers' orders improved, raising slightly the short term prospects for higher production. The Isae Institute's business confidence index rose to 89.6, the highest since February, from a revised 87.6 in April, the Rome-based research center said today. That was the biggest monthly increase in more than a year.

``Confidence is bouncing back a little, but it won't be sustainable,'' said Paolo Pizzoli, an economist at ING Bank NV in Milan. ``When Germany's economy slows, it's going to hurt Italy.''

German growth is helping to offset the effect of a strong euro and rising energy costs. Germany's Ifo survey also rose slightly to 103.5 in May from 102.4, according to a May 21 report.

``The data is in line with what recently emerged from the Ifo survey of German manufacturers,'' Isae said in a statement. ``Businessmen are more optimistic about demand, especially foreign demand, and the outlook for production.''

In terms of the sub indexes, the measure of total orders rose to minus 16 from minus 18 in April, and the three-month outlook for production rose to 14, the highest since November, from 9 in April. An index of foreign orders rose to minus 16 from minus 20.

France Business Confidence May 2008

French business confidence declined to the weakest in more than two years in May as rising energy prices and strong euro hurt the outlook for corporate sales and profits. An index of sentiment among 4,000 manufacturers slid to 102 from 106 in April, according to Insee, the Paris-based national statistics office. That was the lowest since December 2005.

Growth in the euro area's second-largest economy has been slowing recently as inflation hurts consumer spending at the same time as exporters feel the pinch of slowing orders from the U.S., a euro worth around $1.55 and record oil prices.

A sub-index of how executives see the economic outlook fell to minus 15 from minus 9, while a gauge of orders dropped to minus 11 from minus 4 and a measure of foreign orders declined to minus 7 from 3.

The 18 percent gain in the euro against the dollar over the past year will continue to put pressure on exports as rising inflation weighs on consumer demand in local markets. Consumer prices rose 3.4 percent in France this month from a year ago. Higher energy costs are pushing up inflation, with the price of oil reaching a record $135.09 a barrel on May 22.

The French government expects growth of between 1.7 percent and 2 percent this year, compared with 1.9 percent last year.

Friday, May 23, 2008

Italy GDP Q4 2007 and Q1 2008

Well, for the first time in six months we do have some real GDP data to look at, even if it doesn't make particularly attractive reading. If we start with the quater on quarter growth rates, we find that in Q4 2007 Italy's economy contracted by 0.4% vis-a-vis the Q3 2007 level, while Q1 2008 GDP was up by 0.4% on Q4 2007. Now the more astute among you might like to note that since the 0.4% contraction in Q4 was on a larger base than the 0.4% expansion in Q1, in fact the net result is that the Italian economy actually grew smaller in the six months between Q3 2007 and Q1 2008 -declining in chain-weighted contant prices from 321.83 billion euro to 321.77 billion euro. I don't know if anyone wants to call this overall contraction a "technical recession", but it certainly isn't evidence for an economy in good shape, and the sad part is that there is obviously worse to come.

Year on year the picture doesn't look that much better, since we find the Q4 2007 GDP was only up 0.1% over Q4 2006, while Q1 2008 was up 0.2% in comparison with Q1 2007.

Whichever way you look at it the Italian economy has been virtually stationary over the last 12 months, and it looks like this situation may be repeated in the coming 12months. Unfortunately the Italian statistics office didn't provide a breakdown of the GDP figure in the preliminary estimate for the first-quarter and Istat will release its final report on Q1 Italian GDP on June 10, so we still have to wait a bit to find out what was responsible for the bounce back. However, what we do know is that in the fourth quarter Italian consumer spending fell 0.2 percent over the previous quarter.

Both imports and exports contracted in Q4 2007 when compared with the previous quarter, imports by 1% and exports by 1.3%.

As a result of the deterioration in exports, the trade deficit also got slightly worse and this was obviously a factor in the negative growth performance registered in the quarter, from 1.165 billion euros in Q3 to 1.443 billion euro in Q4.

Also, if we come to think about productivity, we might like to remember that Italy was actually creating employment during 2007, and that employment was up year on year by 1.3% in Q4, while GDP was only up by 0.1%, so on a rule of thumb calculation basis you could come to the conclusion that labour productivity actually declined during the year. Certainly there is no reason to imagine there was any significant improvement, and this is very bad news indeed.

Italy's problem is not just one of this quarter or this year. As can be seen from the chart below it is very long term. The big question is now what happens to the fiscal deficit this year, and what the credit ratings agencies are going to have to say about the situation.

French Consumer Spending April 2008

French consumer spending on manufactured goods unexpectedly fell for a second month in April as shoppers scaled back purchases of cars and clothes.

Such spending, which accounts for about 15 percent of the economy, dropped 0.8 percent, after a revised decline of 1 percent in March, Insee, the Paris-based national statistics office, said today. Economists expected a 0.5 percent increase, the median of 22 estimates in a Bloomberg survey showed. Spending rose 0.4 percent from a year earlier. Inflation near the fastest in 12 years has pushed consumers' confidence to a record low, slowed spending growth, and hurt President Nicolas Sarkozy's popularity. Households' purchasing power may decrease further in coming months as economic expansion loses momentum.

Thursday, May 22, 2008

Italy Consumer Confidence

Italian consumer confidence bounced back somewhat in May, rising to its highest level so far this year. The announcement was made the day after Prime Minister Silvio Berlusconi formed a new government and announced tax cuts and relief for homeowners facing higher mortgage payments.

The Rome-based Isae Institute's consumer confidence index, calculated from a survey of 2,000 families, rose to 103.2 from a revised 99.9 in April. The increase was the second monthly gain since the index fell to a four-year low in March, but the reading is still well down even on the level being registered in the second half of last year.

Consumer optimism about their short-term prospects surged to 101.7 from 95.6, while confidence about the economic situation rose to 84.9 from 79.6, Isae said today in its report. The change of governement and the fiscal promises seem to be providing some sort of ashort-term boost, but the scenario in the medium run still remains pretty bleak.

The first legislative act of the new government yesterday was to scrap the country's main residential property tax and reduce levies that workers are charged on overtime pay. The government also announced an agreement with banks to allow homeowners to freeze mortgage payments at 2006 rates, a measure that could affect 1.25 million families. More than 70 percent of Italians back the measures, a survey by polling company IPR Marketing showed today.

Eighty-seven percent of Italians support the removal of ICI, a tax property tax homeowners pay to local authorities, IPR said. The pollster surveyed 1,000 Italians yesterday, after Berlusconi held his first policy making cabinet meeting and confirmed the abolition of the tax. No margin of error was given.

Confindustria President Emma Marcegaglia also expressed support for the government's initial measures during a speech in Rome thi morning. Referring to the tax cut, Marcegaglia said she was ``satisfied with this first step'' and emphasised that Confindustria would "collaborate'' with the government on measures to improve the country's competitiveness.

The agreement between the government and the Italian banking Association on mortgages will allow homeowners with variable-rate loans to lock in monthly payments at levels they were paying before interest rates began rising. The European Central Bank has doubled its benchmark rate to 4 percent since Dec. 2006, pushing up the cost to homeowners with variable-rate mortgages.

Italians who take advantage of the new measure will make payments at the 2006 levels for the duration of the loan. At maturity, if rates have risen or held at the post-2006 levels, the loan will be extended to allow banks to recover what they would have earned without renegotiation.

The big question, however, is not so much the cuts themselves, as how they are to be paid for. With the credit ratings agencies and the EU Commission now breathing down there necks the Italian government have, at this point, very little margin of manouevre, and cuts here must be counterbalanced by increases there or spending cuts elsewhere, and especially as income will slow as a result of the stagnant economy.

The tax cuts will be worth about 4 billion euros ($6.3 billion), Finance Minister Giulio Tremonti said yesterday. Tremonti also said the cuts will be fully financed and won't increase Europe's largest debt. The government will cut public spending to pay for the tax cuts, Tremonti said. He added that the government has already identified 2.6 billion euros in spending cuts to help finance the tax package. Further measures would be adopted in June to produce more financing to cover the lost revenue.

Looking out into the medium term though, Finance minister Giulio Tremonti said that Italy's economy will most probably stall this year and that there are no "easy fixes". With the continuing rise in energy and food prices Italians remain on tight budgets and according to the purchasing managers index Italian retail sales have been falling for the past 14 months.

The present government's outlook is even gloomier than the European Commission's forecast of 0.5 percent growth, which may make Italy the slowest-growing economy in the euro region in 2008 (we still have to see how rapidly the Spanish economy actually slows this year). The Italian economy may well have already slipped into recession either in the first quarter of this year or in the last quarter of 2007, and has suffered three recessions between 2001 and 2005. In any event we should not be living in the expectation of any rapid "bounce-back" here.

However the long wait on the GDP data front should come to an end tomorrow, since the national statistics office, Istat, will release growth figures for the fourth quarter and first quarter of 2008 at 11 a.m. Rome time.

Wednesday, May 21, 2008

IFO Business Climate Index May 2008

German business confidence bounced back slightly in May according to the Munich-based Ifo institute business climate index. The index which is based on a survey of 7,000 executives, rose to 103.5 from 102.4 in April.

The IFO result is not that interesting, since the composite index has actually moved very little, and is still well below earlier highs. What is slightly interesting is that the improvement is due to current conditions, which firmed slightly (ie May is not a VERY bad month, see the chart below), but the expectations index continues to move down. This seems to suggest that the current business situation has been regularly exceeding previous expectations in recent months (growth in demand for exports in Russia and Eastern Europe perhaps), but that this situation will not last forever. At some point the "unusual circumstances" will not continue and the cold light of normality will set in.

Tuesday, May 20, 2008

German Producer Prices April 2008

German producer-price inflation, widely considered to be an early indicator of price inflationpressures in the economy, accelerated to the fastest pace in almost two years in April, largely on rising energy costs. Prices for manufactured goods increased 5.2 percent from a year earlier, the most since August 2006, the Federal Statistics Office in Wiesbaden said today.

Adding to cost pressures, German wholesale-price inflation slowed less than economists expected in April to 6.9 percent from 7.1 percent in the previous month. Crude oil prices have gained 33 percent this year, reaching a record $127.82 a barrel on May 16. Energy prices rose 12.6 percent from a year earlier and oil products were 17.8 percent more expensive, the statistics office said. Excluding energy, producer prices rose 2.7 percent.

The European Central Bank on May 8 kept its key interest rate at 4 percent, signaling concern that companies are raising prices and wages. Inflation has been pushed higher by record energy and food prices, constraining consumers' spending power, and todays release shows a continuing price pressure which the ECB will findit very hard to ignore. In addition it is already clear that May will show significant upward pressure on prices simply due to energy prices, so with today's figures, the bad news certainly isn't over yet.

German ZEW Economic Sentiment Index May 2008

The ZEW Indicator of Economic Sentiment for Germany remained - more or less - stable in May 2008. The composite indicator decreased slightly - by 0.7 points - and now stands at minus 41.4 points after registering minus 40.7 points in April. This, however is still well below its historical average of 29.6 points.

Movement in the ZEW Indicator of Economic Sentiment seems to have been mainly influenced by the following two factors. On the one hand, economic expectations for the next six months for the United States and consequently also for the German export industry have increased considerably. On the other hand, inflationary risks remain high. This latter element is expected to negatively affect private consumption in Germany.

"German firms were very successful in the first quarter of 2008. However, the economic momentum should gradually loose speed because of increasing refinancing costs and a strong euro. This should have a negative impact on firms.", said ZEW President Prof. Dr. Dr. h.c. mult. Wolfgang Franz.

The assessment of the current economic situation in Germany improved in May. The corresponding indicator increased by 5.4 points to 38.6 points. A separate analysis up to May 14, 2008 shows that the assessment of the current economic situation in Germany improved after the publication of the German GDP-growth for the first quarter of 2008. The ZEW Indicator of Economic Sentiment, in contrast, worsened.

Economic expectations for the euro zone stabilized in May. The indicator slightly increased by 1.2 points and now stands at minus 43.6 points. The indicator for the current economic situation in the euro zone dropped by 4.1 points and now stands at 11.4 points.

Friday, May 16, 2008

European Car Sales April 2008

New car sales in Europe rebounded sharply in April, showing a 9.6-percent rise over April 2007 the ACEA European automakers association said today. The rebound is more of a statistical impact than a real rise however, since Easter was in March this year. Also the rise in April came after a slump of 9.5 percent in March. The y-o-y figures, which showed similar rises in both western Europe and the newer eastern EU states in April, were thius largely due to extra working days in most European nations last month thanks to the early arrival of Easter this year.

Smoothing out the April blip by looking at the year-to-date figures, Italy recorded an 8.2 percent drop in new car registrations to 867,000 vehicles while Spain -- the smallest of the big five European markets -- notched up an 11.5 percent fall to 471,000.

German automotive industry association VDA said late on Thursday that this was the fourth month in a row that registrations of new cars fell in Italy.

Indeed taken as a whole new car registrations rose 1 percent in the first four months of the year, and this growth was almost entirely due to growth in the new EU markets in Eastern Europe.

A total of 1,421,230 new cars were registered in April in the 28 countries reviewed by the ACEA - the 27 EU member states, minus Cyprus and Malta, plus Iceland, Norway and Switzerland.

Germany, the biggest European market, continued to make up ground following a relatively poor last year due to a sales tax rise, with its April 2008 figure of 317,960 new car registrations representing a 20 percent rise over the same month last year.

The German figures were "supported by an improving labour market and a recovering consumer confidence," the ACEA said.

By contrast Italy, the second biggest European car market, saw figures continue to slide, down 2.9 percent to 201,844. There would have been a bigger deceleration of 12 percent if it had not been for the extra working days, the automakers' association said.

Regarding constructors' figures, the biggest European automaker Volkswagen enjoyed strong sales growth of 11.4 percent to 293,567 units.

Its compatriots did even better in ales growth terms with BMW registering a 24.7 percent increase to 80,295 units and Daimler 17.6 percent to 79,660 units.

The second biggest seller, France's Peugeot Citroen, enjoyed a more modest 6.8 percent hike in sales to 183,229 units with Ford Group sales up 7.8 percent at 141,488.

Toyota sales continued their downward trend, dropping 1.7 percent with its top end Lexus marque suffering a 12.9 percent fall to just 2,704 new registrations in April.

Thursday, May 15, 2008

France GDP Q1 2008

France's economic growth accelerated more than economists forecast in the first quarter as stronger exports more than offset weaker consumer spending. Gross domestic product in the euro region's second-largest economy expanded 0.6 percent from the previous quarter, when it grew 0.3 percent, national statistics office Insee said today in Paris. On a year on year basis the economy grew by 2.2% when compared with the first quarter of 2007.

In the quarter, exports rose 3.1 percent, after slipping 0.2 percent in the last three months of 2007. Imports climbed 1.9 percent, meaning that net trade added 0.3 percentage point to GDP growth in the period, Insee said.

Consumer spending growth slowed to 0.1 percent from 0.6 percent in the fourth quarter. Stocks were unchanged after a drop the preceding quarter. Corporate investment climbed 1.8 percent, after 1.2 percent in the last quarter.

Fourth-quarter growth was revised lower from the previous estimate of 0.4 percent. From a year earlier, the economy expanded by 2.2 percent in the first quarter, Insee said.

Separately, the institute said the economy grew 2.2 percent in 2007, the same pace as 2006, as corporate investment rose and households gained purchasing power and increased their savings. Adjusted for working days, GDP expanded 2.1 percent in 2007, down from 2.4 percent in 2006.

Hurt by deteriorating finances of local governments, the country's total public deficit increased by 7.7 billion euros to 50.3 billion euros, representing 2.7 percent of GDP in 2007 from 2.4 percent in 2006. Public debt amounted to 1.21 trillion euros at the end of last year, amounting to 63.9 percent of GDP, up from 63.6 percent at the end of 2006.

Public spending amounted to 52.4 percent of GDP in 2007, down from 52.7 percent the previous year. The tax burden fell to 43.3 percent of GDP in 2007 from 43.9 percent in 2006.

Wednesday, May 14, 2008

German Inflation April 2008

As reported by the Federal Statistical Office (Destatis), the consumer price index for Germany rose 2.4% in April 2008 on April 2007. Compared with March 2008, the index was down 0.2%. In March 2008, the year-on-year rate amounted to +3.1%. The estimate for April 2008 based on the results from six Länder was thus confirmed.

The harmonised consumer price index (HICP) for Germany, which is calculated for European purposes, rose 2.6% in April 2008 on April 2007. Compared with the previous month, the index was down 0.3%. The HICP estimate of 28 April 2008 was thus confirmed.

The relatively low year-on-year rate of price increase in April 2008 is due to two special influences: Compared with a year earlier, prices decreased especially for package holidays (−7.4%) and accommodation services (−0.4%). This is mainly attributable to the early Easter holidays in March 2008; in 2007, Eastern was in April (calendar effect). In education, the introduction of tuition fees in some Länder a year ago (April 2007) for the first time did no longer have any influence on the rate of price increase (basis-related effect). Each of those two effects leads to a reduction of the year-on-year rate of price increase by 0.2 percentage points.

The year-on-year rate of price increase is characterised mainly by higher prices of mineral oil products. Despite the strong euro, the world market prices of crude oil are further rising. Not considering the price trend for mineral oil products, the rate of price increase would have been just 1.7%. Motor fuel prices were up 8.8% on a year earlier (including supergrade petrol: +5.8% and Diesel fuel: +17.2%). Liquid fuel prices climbed 38.9% and hence saw the highest increase on the previous year. The prices of the other household energy sources, too, rose considerably on a year earlier (including electricity: +7.3%; gas: +3.6%; charges for central and remote heating: +3.4%).

Prices of food and non-alcoholic beverages increased an average 7.1% in April 2008 compared with April 2007 (of which food: +7.3% and non-alcoholic beverages: +6.0%). As in the previous months, unusual price rises were observed for milk, cheese and eggs (+24.0%; including curd: +47.2% and full-cream milk: +31.0%) as well as for oils and fats (+16.7%). Consumers had to spend more than a year earlier also for fruit (+9.7%) and for bread and cereals (+8.8%; including pasta: +26.6%). Prices were down, however, for vegetables (–5.2%; including potatoes: −11.2%; tomatoes: −19.4% and salad: −23.8%).

The 0.2% price decrease on March 2008 is due to opposite price trends. In April 2008, seasonal month-on-month price decreases were observed especially for travels (including package holidays: −13.4%; accommodation services: −6.0% and air travels: −4.3%). However, especially prices of liquid fuel rose markedly (+4.1%). Food prices were up a total 0.4% on the previous month, including especially vegetables (+1.1%). Seasonal price rises were observed, among other things, for potatoes (+4.2%) and peppers (+7.8%), whereas prices were markedly down for cucumbers (−20.9%). There were opposite price trends also for other food: Prices were again down in April 2008, for example, for butter (−2.9%), while margarine prices were up (+6.0%). The prices of milk products (+0.3%) and of bread and cereals (+0.4%) rose only slightly on the previous month.

France Inflation April 2008

France's inflation rate stayed close to a 12-year high in April, sustained by rising energy and food costs. Consumer prices climbed an annual 3.4 percent, down from 3.5 percent in March, based on European Union-harmonized methods, Insee, the national statistics bureau, said today in Paris. The March inflation rate was the highest since 1996, when Insee began reporting the data. Prices increased 0.4 percent from March.

Spain Industrial Output March 2008

Spanish industrial output adjusted for calendar effects fell 2.6 percent in March from a year earlier, the National Institute for Statistics (INE) said. INE also said consumer goods output fell 4.6 percent from a year earlier, while capital goods output was down 0.4 percent. Intermediate goods output fell 6.9 percent, while energy goods output rose 10.2 percent.

Unadjusted industrial output dropped 13.3 percent in March from a year earlier.

Spain GDP Q1 2008 Preliminary

According to the quarterly GDP advance estimate issued today by the INE, during the first quarter of 2008, Spanish Gross Domestic Product registered a real growth rate of 2.7%, as compared with Q1 2007. Thus the slow down continued, following a trend which seems to have started in the first quarter of 2007. According to the statistics office the reduce figure was the result of a substrantial slow-down in national demand, which was partially ofset by a less-negative contribution from foreign trade. Put another way, the slowdown in imports which resulted from the reduction in internal demand meant that external trade was less of a drag on domestic GDP growth, of course the other side of the coin is that the impact of this will be felt (for example) in Germany.

Moreover, the quarter-on-quarter GDP growth rate was 0.3%, five tenths less than the 0.8% achieved in the previous quarter.

As can be seen from the quarterly growth chart the Spainsh economy most probably peaked in the last quarter of 2006. The economy then slowed gradually for three quarters, and then we hit the financial turmoil of August 2007, and the probles in selling cedulas, after which point the Spanish economy simply went into "nose dive" if present trends continue (and there is no reason whatsoever for thinking they won't) then I think we have a 50% possibility of q-o-q negative growth in Q2, and a virtual certainty of negative q-o-q in Q3. In other words the Spanish economy is at best two quarters, and at worst one quarter away from outright recession at this point.

Which means we can expect a maximum growth of less the 1% for GDP in full year 2008, and probably much less, with the emphasis on much.

On 21 May the INE will publish the complete tables and charts of the Quarterly Spanish National Accounts for the first quarter of 2008.

Update 15 May 2008

The Financial Times have an article this morning from Leslie Crawford (Madrid) and Frank Atkins (Frankfurt) on the Spanish slowdown. They have most of the picture, although they probably still underestimate the depth of the present problem. Also they say this about Germany:

Nevertheless, Spaniards can draw comfort from the fact that growth in northern Europe is proving to be more resilient. Stronger-than-expected growth in Germany and France is good news for Spanish exporters, who rely heavily on northern Europe for orders.

The sharp slowdown in Spain contrasts with the much more upbeat data expected today from Germany. GDP in Europe’s largest economy grew at a significantly faster pace in the first quarter than the 0.3 per cent growth seen in the final three months of last year, according to analysts’ estimates.

I think this, while all being true is rather misleading, since Germany is now evidently itself slowing (and part of the explanation is probably the reduction in exports to Spain and Italy), so if we look forward to the second or third quarter it seems pretty clear that Germany will itself be having a slowdown (a slowdown, not a housing crash), and while this will likely be more moderate than Spain, it won't be a plus for Spain as the authors suggest. Latin America is a much more likely potential plus, but this is probably rather in the longer term.

Otherwise, as I say, the FT more or less have a fair summary of the game so far:

The brusque slowdown appears to have caught the recently re-elected Socialist government by surprise – even though Spain’s biggest business lobby, the Círculo de Empresarios, warned last month about the risks of stagflation, a period of little or no growth with high inflation.

Pedro Solbes, finance minister, recently lowered the official growth estimate for 2008 from 3.1 per cent to 2.3 per cent – but on the basis of the economy’s recent performance, the new forecast looks optimistic.

Mr Solbes, in Brussels yesterday for a meeting of European finance ministers, would only confirm that the economy was “decelerating rapidly”.

Economists worry about the impact of the slowdown on employment and on government revenues. Spain has a fiscal surplus of about €20bn – two per cent of GDP- which Mr Solbes says he will spend to keep the economy afloat. Revenue collection in the first months of the year, however, have been below expectations.

Between 2004 and 2006, Spain created one-third of all the new jobs in the EU, many of which were filled by Spain’s 4.5m immigrants – 10 per cent of the total population.

Unemployment is now rising as the labour-intensive construction and services industries shed tens of thousands of jobs. Last month, unemployment topped 2.3m – 15 per cent higher than a year ago. Job creation in Spain stops when growth dips below 2 per cent a year, economists say.

The slowdown is hitting immigrant workers particularly hard, and Celestino Carbacho, the new labour and immigration minister, is understood to be considering voluntary repatriation schemes for unemployed foreigners who wish to draw Spanish unemployment benefit in their home countries. The Spanish government says it would also support the returnees with small loans to start up businesses. However, similar schemes have attracted only a handful of volunteers in the past.

Monday, May 12, 2008

Italy Industrial Output March 2008

Italian industrial production fell again in March for the second consecutive month. Output was down 0.2 percent from February, when it also fell by the same amount, the national statistics office said in Rome today.

On a year on year and working day corrected basis (Easter was in March this year) output was down by 2.5%. Production of Italian consumer goods fell 0.7 percent from February and the output of durable goods like refrigerators declined 2.8 percent. Non-durable goods dropped 0.7 percent. The only gain came in energy related goods, which rose 2.3 percent.

As forecast on this blog last month, a significant part of the decline in output was probably caused by the plunge in car production, which fell 9.2 percent from a year earlier on a non-adjusted basis. Istat did not give car output figures compared with the previous month.

Also, and for those of you who are interested in this kind of thing, the manufacturing PMI seems to be giving a reasonable good first pass forecast of what is actually happening, and the index showed strongish contraction again in April, so the agony seems set to continue, at least for the time being.

The IMF are forecasting that Italy's economy will expand by a mere 0.3 percent this year, or a fifth of last year's pace. We haven't see any recent GDP data yet, but looking at the data we do have this would seem to be a not unreasonable guesstimate at this point.

Thursday, May 08, 2008

German Exports March 2008

Exports from Germany fell for the second consecutive month in March as the global slowdown and rise of the euro continued to weigh on orders. Sales abroad, adjusted for working days and seasonal changes, declined 0.5 percent from February, when they when they were down 0.2 percent, the Federal Statistics Office said today. The rate of increase in Gernam exports has now been slowing steadily since the last quarter of 2006.

The trade surplus narrowed to 16.7 billion euros ($26 billion) from 16.9 billion euros in February. The surplus in the current account, which gives perhaps the best measure of all exports including services, widened to 17.2 billion euros from 16.1 billion euros the previous month.

The German economy is expected by Germany's leading economic institutes to expand 1.8 percent this year and 1.4 percent in 2009, but these numbers are now looking very questionable, given the extent to which German GDP growth is dependent on exports. These forecasts are already a downward revision since they had previously forecast growth of 2.2 percent for this year. The global outlook is certainly not encouraging for the idea of a sudden "bounce back" in German exports and International Monetary Fund last month cut its 2008 global growth forecast and said the world economy faces a 25 percent chance of recession.

The euro has appreciated 14 percent appreciation against the dollar over the past year and reached a record $1.60 on April 22. At the same time, surging raw-material costs are eroding spending power. Crude oil prices have doubled in the past year and breached $120 a barrel for the first time this week.

German manufacturing growth also slowed last month, business confidence fell and factory orders dropped for a fourth month in March. Investors also became more pessimistic in April. Plant and machinery orders fell 5 percent in March from a year earlier, according to the VDMA machine makers association.

German industrial production declined 0.5 percent in March from February, when it rose a revised 0.2 percent, according to the Economy Ministry earlier today.

German exports to other European Union countries dropped 1.5 percent in March from a year earlier, they rose 3.5 percent to non EU countries (including, of course, Russia and Ukraine).

Germany exported goods to the value of EUR 84.0 billion and imported goods to the value of EUR 67.3 billion in March 2008. German exports of March 2008 were thus 0.2% and imports 3.3% above the respective March 2007 levels. Upon calendar and seasonal adjustment, exports and imports showed opposite month-on-month trends: Exports decreased by 0.5%, while imports increased by 0.8% on February 2008.

The foreign trade balance showed a surplus of EUR 16.7 billion in March 2008. In March 2007, the surplus amounted to EUR 18.7 billion. Upon calendar and seasonal adjustment, the foreign trade balance recorded a surplus of EUR 15.4 billion in March 2008.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of EUR 17.2 billion in March 2008, which included the balance of services (EUR –0.7 billion), factor income (net) (EUR +5.0 billion), current transfers (EUR –3.1 billion) and supplementary trade items (EUR –0.7 billion). In March 2007, the German current account showed a surplus of EUR 20.7 billion.

In March 2008, Germany dispatched commodities to the value of EUR 54.8 billion to the Member States of the European Union, while it received commodities to the value of EUR 44.1 billion from those countries. Compared with March 2007, dispatches to the EU countries thus decreased by 1.5%, while arrivals from those countries rose by 1.8%. Commodities to the value of EUR 36.3 billion (–2.7%) were dispatched to the euro area countries in March 2008, while the value of commodities received from those countries was EUR 30.4 billion (+0.2%). Commodities to the value of EUR 18.5 billion (+0.8%) were dispatched to EU countries not belonging to the euro area in March 2008, while the value of the commodities which arrived from those countries was EUR 13.7 billion (+5.5%).

Germany exported commodities to the value of EUR 29.2 billion to and imported commodities to the value of EUR 23.2 billion from countries outside the European Union (third countries) in March 2008. Compared with March 2007, exports to third countries were up by 3.5% and imports from those countries by 6.3%.

German Industrial Output March 2008

Industrial production in Germany declined in March as cold and wet weather kept building sites shut and production of factory machinery fell. Output, adjusted for seasonal swings and inflation, fell 0.5 percent from February, the Economy Ministry in Berlin said today.

The slower pace of global economic expansion as well as the stronger euro are eroding demand for cars and chemicals made in Germany while a cold Easter offset gains in construction output made during the mild winter. Record oil prices and higher credit costs also whittle away spending power and cloud the investment outlook. Export and manufacturing orders both fell in March.

Construction output fell 12.3 percent in March, the ministry said in a statement. According to the German weather service, March was ``particularly wet'' and the second half ``wintry.'' The production of investment goods fell 1.8 percent in March, while at the same time, energy output gained 5.5 percent in the month and the production of intermediate goods rose 1.1 percent.

Germany's expansion is losing momentum after the collapse of the U.S. subprime mortgage market sparked global writedowns and pushed up lending costs. The International Monetary Fund in Washington last month cut its global growth forecast and said the world economy faces a 25 percent chance of recession.

Factory orders from other euro-area states fell 3.5 percent last month, compared with a 2.1 percent gain from non-euro area countries, the Economy Ministry in Berlin said yesterday. About 40 percent of German exports are shipped to the euro region.

Still, services growth in Germany accelerated in April, the Royal Bank of Scotland Purchasing Managers Index showed this week. The index rose to 54.9 from 51.8 in March and some industry sectors are still weathering the headwinds.

German business confidence declined for the first time in four months in April. Investors also became more pessimistic. European manufacturing growth slowed for a third month in April and confidence dropped to the lowest in 2 1/2 years.

In the euro region as a whole, manufacturing growth slowed for a third month in April and confidence dropped to the lowest in 2 1/2 years. Retail sales fell 1.6 percent in March from a year earlier, the European Union's statistics office said yesterday. That's the biggest drop since at least 1995.

Companies are also grappling with the euro's 13 percent gain against the dollar in the past year, which threatens to erode exports by making them less competitive. The currency hit a record $1.6019 on April 22. Crude oil prices have doubled in the past year and breached $120 per barrel for the first time this week.

The German economy may expand 1.8 percent this year instead of a previously projected 2.2 percent, the leading government- sponsored research institutes said April 17. Growth will slow to 1.4 percent in 2009, less than the economy's long-term average of 1.5 percent, they forecast.

Wednesday, May 07, 2008

Wag the Dog?

by Claus Vistesen

I am sorry to paraphrase, arguably, one of Hollywood's better conceptions; but having left the last Fed meeting and looking towards Thursday's corresponding action in London and Frankfurt I cannot help but feel that the tail just might be wagging the dog this time around. One thing is certain; ever since the credit turmoil began and the Fed started to aggressively slash the nominal interest rate to ward off disaster it was assumed ex ante that the ECB and perhaps other of the global central banks would follow as per function of the lack of de-coupling. Now, as investors seem to settle on the notion that the US is in fact in a recession it may be time to turn towards another of the bogey-man out there in the form of inflation.

I am still a bit in limbo as regards to where I see things moving. I still see the ECB cutting rates at least once in 2008 on the back of an accelerated slowdown in the Eurozone but that move won't come on Thursday when Trichet and co. are likely to reiterate the chorus that inflation remains the variable to watch. Yet, this was also always going to be the main rub for central bankers in the sense that in a stagflationary environment their main and essentially only weapon of choice becomes increasingly blunt. Quite simply, in a world with free movement of capital, excess liquidity relative to the capacity to absorb it, and lingering structurally inbuilt interest rate differentials it is not at all certain that toggling nominal interest rates higher will have any meaningful effect at all.

On the contrary, as we have seen across the global economic edifice many economies, emerging as well as developed, have been hard at work trying to hold off the pressure from capital inflows even in a situation of rather large external balances. Thailand would be a prime example here but more significantly in a global context such heavy weights as India, Brazil, and China on whose shoulders many hopes of recoupling lie have felt the pressure of the international hunt for yield. Obviously, this is not the case everywhere and across the Eastern European region as well as in Iceland external deficits are fast becoming a real issue.

So, what to do for those poor central bankers and more pertinently what does it mean that they don't seem to agree on what to put first in line of priorities assuming that they can see that there are both growth and inflation risks.It is in this light that I am suggesting that the dog is getting wagged rather than, as we have seen, the tail. Consequently, meetings at the BIS which began this Sunday had central bankers worryingly mainly about high and rising inflation. And what is more; they are even waking up to the fact that they stand largely helpless in doing anything about it at least in so far goes as a given central bank trying to quell the inflation bonfire in its respective domestic economy.

If we home in on the ECB who is deciding on interest rates later this week it even seems as if sentiment is solidifying behind the ECB's vigilance against inflation. Solidifying sentiment is of course unequivocally good and in a European context it even prompted Luxembourg Finance Minister Jean-Claude Juncker to exclaim that the ECB had become the inflation fighting machine we all wanted. So far Trichet and his minions have tried hard to live up to this adamant label. On several occasions both in the context of interest rate meetings and beyond have we heard hawkish statements from the ECB much to the chagrin of France's finance minister Christine Lagarde; I would imagine that they are also keeping more than a weary eye in Spain and Italy.

As I have noted before the ECB is now faced with a growing divergences between the Eurozone economies. We don't have to look beyond the most recent data snippets to see this. As Edward details over at Global Economy Matters just about everyone save perhaps Germany is now beginning to feel the pinch. Spain and Italy in particular seems to have entered what appear to become very severe corrections. To make matters more complicated the service PMI from Germany actually rose today while the aggregate Eurozone indicator stayed very close to th 50 mark of zero expansion (in fact, it rose a nudge). Thus, I still maintain my view that the ECB will soon have to go for growth rather than inflation. Two issues are however important here. Firstly, I want to reiterate a point I made on an earlier occasion that we will need to see a material slowdown in Germany before the ECB moves. Secondly, the newly found focus by a wide range of observers and investors on inflation relative to downside economic risks mean that the ECB may just have a stronger hand with respect to an adament view on inflation.

Not everybody agrees though. Over at Morgan Stanley (may 2th GEF) Joachim Fels and Manoj Pradhan continue their ongoing global inflation watch and they seem to share my view (or I theirs if you will). Consequently, Fels et al believe that central banks will soon be inclined to go for growth rather than inflation.

We think breakeven inflation rates are distorted downwards by safe
haven buying and collateral concerns, and true inflation expectations in the
bond market may thus be higher. However, even taking this factor into
account, we think investors are still too confident in central banks’ ability
and willingness to stem higher inflation in the coming years. Thus,
central banks are likely to keep missing their inflation targets in the coming
years, and both true inflation expectations and breakeven inflation rates should
rise over time.


(...) we also think investors are still too confident in central
banks’ ability and willingness to stem higher inflation in the coming years. Our
bottom line: central banks are likely to keep missing their inflation targets in
the coming years, and both true inflation expectations and breakeven inflation
rates should rise over time.

Behind this quote lies a critical narrative in which central banks falsely choose to neglect inflation risks in an effort to boost growth. As I have argued before I don't tend to see it this way or more specifically I think the current situation is a hell of a lot more complicated than blaming it on the central banks. Recently, I took a swing at precisely Fels and his colleagues for their analysis showing how in fact current interest rates in the Eurozone are accomodative. I think such claims are very hazardous and just as it may be a question of 'missing markets' it is also a question of an unprecedented process of global recoupling (unwinding of population and economic imbalances). Coupled with lingering wide global interest rate differentials this means that no one really knows what 'global capacity' is and much more importantly whether capital is being allocated in an 'efficient' manner. And speaking of which; recent news from the fx markets suggest that the EUR/USD is not as perky as it used to be. 1.60 consequently seem to have been the interim borderline.

There can be many reasons for this (see Macro Man here) but more prominently is of course the question of whether those big wallet central banks are beginning lose their fondness for the Euro. In this way, a large part of this boils down to the whole Brad Setser/Macro Man detective work about just what China and the Petroexporters are doing since they are the big price movers and the speculators simply try to go where they go. As Macro Man notes It could seem as if someone with a big pocket sold off some Euros at 1.60 and now that we are hovering at 1.55 it will be interesting to see what happens next. Obviously a hawkish statement come Thursday could take it right back. Most still see the EUR/USD heading lower though but the key is whether we will see more rallies before this happens. Stephen Jen (permalink later) is musing about a EUR/USD at 1.40 at year's end. I fundamentally agree with him but there is also a strange lock-in effect here since who the hell knows what the equilibrium is? My guess is that as re-coupling moves on (and it will, just look at Brazil and their upgrade to IG) the EUR/USD will find a balanced level at some point but as long as strong interests are vested in terms of a fixed currency regime (or not) we could see a lot of volatility.

So, who exactly is wagging who here?

It is obvious that growth divergence dilemma persists for the ECB. If anything, it has now grown worse with the recent abysmal data from Spain and Italy at the same time as Germany continues to run on the last legs of strong external demand. At the same time inflation continues to linger at levels far above the formal ECB target even though we actually saw signs of abating pressures recently. In this context, it may seem as if the market discourse has changed a bit in favor for the ECB's strong inflation stance as rampant food and energy prices are beginning to pop up on the agenda. I tend to agree with Fels et al. however when they say that the ECB ultimately will lower rates in 2008. I don't agree with the whole 'inflationist central banks' narrative however since I think the situation is a whole lot more complicated than as such. As for concrete calls it is pretty obvious that the ECB is going to stay pat this Thursday. Coupled with today's devastating news from the US housing sector (Fannie Mae's trip to the pillory is covered by Felix here) and the subsequent ripple effect in the debt markets a hawkish statement could take the EUR/USD back towards hitherto record levels of 1.60.