Tuesday, July 31, 2007

German Retail Sales and the VAT Hike

German retail sales rose (slightly) in June over May 2007, but what a song and dance Bloomberg make about this:

"Retail sales in Germany, Europe's largest economy, rose in June as the effect of an increase in sales tax at the start of the year waned. Sales, adjusted for inflation and seasonal swings, rose 0.7 percent from May, when they declined 2.5 percent, the Federal Statistics Office in Wiesbaden said today.......Germany may be able to rely more on domestic demand to drive economic expansion as the impact lessens of the Jan. 1 increase in value-added tax, a levy on sales."

Now, none of this is at all apparent, neither the rise in sales, nor the ability to rely on domestic demand (as I argue here). So lets see what the German Statistical Office actually say:

Turnover in retail trade in June 2007: – 0.8% in real terms on June 2006

WIESBADEN – According to provisional results of the Federal Statistical Office, turnover in retail trade in Germany in June 2007 was in nominal terms 0.2% and in real terms 0.8% smaller than that of the corresponding month of the previous year. The number of days open for sale was 26 in June 2007 and 25 in June 2006.

When adjusted for calendar and seasonal variations (CENSUS-X-12-ARIMA), the June turnover was in nominal terms 0.6% and in real terms 0.7% larger than that of the preceding month.

Compared with the corresponding period of the previous year, retail turnover was in the first six months 2007 in nominal terms 0.8% and in real terms 1.5% smaller than that in the first six months of 2006.

Now, look at the headline. That's right, retail sales year on year were actually 0.8% down in June 2007 over June 2006. So we can all see what is going on I have prepared a small chart which shows the retail sales time series from January 2006.

As we can see, retail sales seem to have had a small spike in April 2007, and apart from that they are down in the first half of 2007 over the 2006 level (0.8% over six months). The German economy is by all accounts having a big export lead boom, so what is happening to retail sales. And what was that Bloomberg was saying about a demand driven recovery?

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.

Wednesday, July 18, 2007

Battle of Wills in the Eurozone

by Claus Vistesen

Cross posted from Alpha Sources

As you may have noticed something is afoot in the Eurozone. The Euro/USD is approaching 1.40, the newly elected French president Sarkozy is testing the patience and resilience of the Eurozone's institutions, and the ECB interest rate decisions have suddenly become much more difficult to call it seems. Regarding the latter point the recent news did not make the life any easier across the trading desks I imagine. As such, we all know that the ECB should raise to 4.25% given the still hawkish discourse but as the data keeps on rolling in the future course seems rather difficult. Lately, we had for example the rather steep fall in German investor confidence in July. Still, with a central bank fixed on inflation and monetary aggregates there is plenty of reasons to stay on the beat at the ECB as headline and structural inflation pressures seem set to bypass cyclical developments in the remainder of 2007. This was further accentuated today by European Central Bank council member Nicholas Garganas who, in an interview, noted the need to further tighten to keep price developments within the comfort threshold at the ECB. However, at this point the trade-off between combating inflation and suppressing economic activity is mounting I think which might very well prompt the ECB to stop sooner rather than later. Regarding a concrete call I maintain that 4.25% is a good call for 2007 and that it will come in September after which the ECB will hold. In this light I think that the implied interest rate from the 3 month Euribor rate which is currently at 4.58% is a bit high given the economic outlook. Yet, this will indeed be a test for the ECB's traditional hawkish stance against inflation since it is likely that structural inflation pressures from headline measures will remain even in the light of an obvious economic slowdown in real terms. Regarding the inflation measure itself the Eurozone wide inflation held steady in June at 1.9%.

On that note, there has also been a lot of flurry recently about Sarkozy's and France's proposal that interest rate decisions might be subject to more vigorous political oversight or whether Sarkozy could be allowed to play his 'get out of jail free card' and implement his announced fiscal plan which means that France would have to deviate from the promise (alongside other member states) to balance its budget in 2010 . Moreover, Sarkozy is of course specifically dissatisfied with the ever climbing Euro and claims that it hurts French exports which is undoubtedly true but what exactly to do when monetary policy is made in Frankfurt. Trichet and Germany for that matter will, of course, have none of this ...

Jean-Claude Trichet's rift with President Nicolas Sarkozy deepened after the European Central Bank chief rejected a French government call for greater political influence in setting interest rates.

Any attempt to influence the ECB violates the European Union's founding treaty, and ``such declarations are not acceptable,'' ECB spokeswoman Regina Schueller said on behalf of Trichet.

Sarkozy, who says gains in the euro penalize European exporters, has clashed with Trichet in an effort to curb ECB interest rates and weaken the currency. While Sarkozy has retreated from a challenge to ECB independence, he said last week that he and Trichet are not ``on the same wavelength.''

Who is right and who is wrong in this case is of course a valid question. However, as I have argued before, from the point of view of Eurozone/EMU governance political intervention is clearly unacceptable. As such, Trichet can really only respond in one way to the French position on interest rates. However, there is indeed a more important underlying issue here which relates exactly to the governance of the EMU system in general. For some well written commentary on this I recommend two recent notes by the Eurozone Watch blog. Lastly, there is of course the perky Euro which also plays an important part in Sarkozy's and France's recent triumphant walk to the Eurogroup meeting. On the Euro I tend to side with Wolfgang Munchau in his analysis recently featured in the FT. As such, it is quite clear at this point I think that the Euro is being pushed up in the global yield game by and large driven by the expectations of interest differentials. The point is, as Munchau argues, that while the Euro indeed at this point is significantly over valued (especially against the Dollar) there are also forces which could lead to further Euro appreciation of the Euro in the short term. I want to emphasise short term here since I am not at all sure how far this can go on which is to say that I am rather bearish on the Eurozone economic fundamentals for the remainder of 2007. Also, as I have argued extensively before I don't see a major tectonic shift from the Dollar to the Euro. Yet, all this could could linger long enough for the ECB to get red ears in the latter part of 2007 and not to mention for Sarkozy to really put on the heat. Especially, if headline inflation continues to drift upwards the ECB will be stuck between a rock and a hard place and at this point the Euro is clearly moving well into uncomfortable territory for e.g. Italy and I also think that Munchau is right on cue to say that Germany might very well get to dislike a strong Euro sooner rather than later.

As such on a final note just watch that Euro go, but also remember that the discourse can quickly change and finally that the ECB is set to be tested on its hawkish inflation stance in a world where economic growth is dwindling and structural and rigid interest rate differentials (and currency regimes) to an ever more increasing degree drive capital flows.

The Wall Street Journal has a well written piece on the Euro in today's online edition. I don't particularly like the narrative on France and how it should it should do more to emulate Germany, we can't all be net exporters you know. But otherwise it is a good preview ... here is a snippet;

Europeans are fighting over exchange rates again, and the rift is instructive about national economic competitiveness. American mercantilists who want a devalued dollar might take note. Almost since he took office two months ago, Nicolas Sarkozy has blamed the euro for La Grande Nation's economic troubles. Claiming that the single European currency is "overvalued," the new French President said exchange rates and "aggressive" monetary policy should be used to spur growth.

His pushiness made Berlin uncomfortable enough to push back -- much to the benefit of Europe, which has little to gain from Sarkozy-style economic interventionism. "It is clear that the independence of the ECB [European Central Bank] is a centerpiece of the euro zone," Angela Merkel said Monday after meeting her French counterpart in Toulouse. Kudos to the German Chancellor for standing up for the central bank's autonomy.

Saturday, July 07, 2007

Lost in Translation at the ECB?

by Claus Vistesen

Cross posted from Alpha Sources

As per usual I am coming in a bit behind the curve relative to my usual brothers in arms on ECB watching, Chaney/Bartsch from MS' GEF and Eurointelligence. Regarding the actual ECB meeting which was held this Thursday the refi rate was expectedly kept at 4.00% but the interesting thing of course, as ever, was the close attention towards Trichet's comments pointing forward to future monetary policy. So what did he say then? Well, this is the point ... I am really not sure something which is of course mirrored in the analyses linked above by MS and Eurointelligence. Regarding my own predictions I nudged them (reluctantly) up to 4.25% back in the beginning of June but I also recently noted, in a large data review, that the economic outlook was becoming increasingly blurred towards the latter half of 2007. However, with the recent strong PMI readings on manufacturing and particularly services demand I would have expected the ECB to come out much more aggressively hinting to a hike in September. This does not seem to have been the case although of course ECB-speak is not always easy to discern. From a strict economics point of view I think, however, that this is good news for the Eurozone since I quite simply don't think that the ECB should raise beyond 4.25% which still seems to be the lowest possible refi rate on which we are going to end 2007. However, I can also understand Bartsch' frustration (linked above) as a market participant with the recent ECB meeting since at this point it is difficult to see just what the ECB is going to do in the meetings to come. Another hike seems a safe bet but when and of course whether it comes sooner (September) or later (October) will also determine the outlook for more hikes in 2007 and thus positions in the FX market. Having said that, I still think that the official MS ECB forecast of 4.5% is too high and no matter when the ECB chooses to move I think 4.25% is the right call for 2007. On this I am in aggreement with Eurointelligence that if inflation pressures and steady monetary expansion prompted the ECB to move closer to 5% it would seriously cripple growth in the Eurozone where I think that future data will further point to a slowdown in momentum, especially from domestic demand indicators.

On a final note I want to emphasis some of the notes from Trichet's introductory statement. Of course, the main discourse remains anchored in the risks to price stability and especially liquidity conditions measured by the M3 continue to take up a lot of the ECB's attention. However, another discourse string which is emerging relates to, as also covered by Eurointelligence, the increasing pressure on prices from rising capacity utilization and essentially constraints. The following is a relevant quote ...

To sum up, in assessing price trends it is important to look beyond any short-term volatility in inflation rates. The relevant horizon for monetary policy is the medium term. Risks to the medium-term outlook for price stability remain on the upside, relating in particular to the domestic side. As capacity utilisation is high and labour markets continue to improve, constraints are emerging which could lead in particular to stronger than expected wage and profit margin developments. Given the vigorous monetary and credit growth in an environment of already ample liquidity, a cross-check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium to longer term.

From a traditional monetary policy perspective I have absolute no problem with this reasoning. However, the crucial question remains as to why capacity constraints are emerging and whether the drivers of this are structural or cyclical. The main question here is two-fold. Firstly, just how inflationary will decreasing capacity be? Clearly, inflation is seriously mounting in many CEE countries but what about in Germany and Italy? Secondly, even if the grind down of capacity is inflationary how should monetary policy respond? This question is directly related to whether in fact not the decline in capacity is deeply structural as a result of ageing and a surplus of exits over entrants in the labour market. Of course, the continuos process of high growth exacerbates this through cyclical effects. But, my main worry is that ECB could end up chasing its own shadow for all the wrong reasons in the fight against inflation and when at some point push comes to shove in key member countries they might end up finding themselves in a hole with slippery walls.

In Summary

Thursday's ECB meeting left the markets wanting more as regards to future policy decisions from Frankfurt. Concerning an interest rate call I am staying put and with the increasingly blurred outlook for economic fundamentals and now also ECB decisions I think 4.25% is the right number for 2007. My guess is that it will come quick in September with the ECB then on hold for the remainder of 2007. As always, indicators for domestic demand as of course inflation pressures should be watched carefully. Especially, I think that the ECB will be sensitive towards the increasing decline in capacity but sadly as I argue above for all the wrong reasons.

Monday, July 02, 2007

More Evidence from The Irish Real Estate Market

by Claus Vistesen

Cross posted from Alpha Sources

Not too long ago I posted on the connection between construction activity in and net migration in Spain and Ireland. The point was to demonstrate how demographics might have been contributing (and still is) to the ongoing debacle on Eurozone imbalances and whether the zone's economies are converging or diverging. In this entry I field further evidence of this connection from Ireland on the basis arguments and data from a paper by Chris Paris from 2005 entitled; Housing and the Migration Turnaround in Ireland; here are the main excerpt from the conclusion ...

(ROI - Republic of Ireland and NI - Northern Ireland)

Issues to do with migration and ethnicity have changed dramatically in both jurisdictions since the early 1990s. Net population loss through migration was superseded by unprecedented net migration gain between 1996 and 2002. Most incomers around 1990 were Irish born, and there were very few immigrants from Africa and Asia. That pattern had changed significantly by the early 2000s, as the overall level of immigrants had doubled and much larger proportions had been born overseas. There was much less change in NI; indeed, there are signs that the population became more rather than less homogenous between 1991 and 2001. This article has demonstrated strong interrelations between migration processes and housing markets: the surge of immigration into the RoI after 1996 added substantially to growing demand for housing and house price inflation, despite hugely increased new housing production. The age distribution of immigrants, especially the high proportion between 25 and 44, largely explains their impact on housing markets. But the migration turnaround is partly a function of the booming economy, rather than an independent phenomenon, and thus the relationships between immigration and the housing boom represents cumulative causation rather than simple one-way cause and effect. Internal migration has also had major impacts on urban spatial outcomes, as cities and towns across the island have grown spatially, at lower densities, with increasing commuting fields and extensive development of detached housing in the countryside.

Regarding the general argument and my use of it I have some basic qualifiers. First of all, the fact that migration flows should have contributed, along side low real interest rates, to the boom in the Irish property market hardly constitutes economic rocket science at this point. Rather, the point is how property market booms in some Eurozone countries to a large extent is behind what is known and labeleled as Eurozone imbalances. It thus follows intimately from this that demographics have something do to with intra-country imbalances in the Eurozone and crucially also why countries reacted differently to the universal stimulus provided by the ECB in the first years of the single interest rate policy. In the graph below the cardinal point is fielded as it plots population growth in Ireland from 1991-2006 as a proportion between 'natural increase' and 'net migration'. As can readily be seen by comparing the trend in net migration as a share of total population growth with the graph from the other posts the correlation seems strong indeed.


To be fair I should also include the actual figures for population growth in Ireland in the periods used above. As such in 1991-1996 the total population growth was about 100.000, between 1996-2002 it was 291.000 and between 2002-2006 it was 322.645. This of course suggests a general correlation between population growth and construction actvitity/housing booms but it should be fairly obvious that it is net migration we should be looking at since it is a proxy, not only for total population growth, but more importantly for growth in the consuming and labouring cohorts. In this way, migration also holds the potential to rapidly alter the fundamentals of an economy in terms of capacity utilization measured by the output gap.