Monday, March 31, 2008

Italian Inflation March 2008

This is not good news at all. According to preliminary data released today by ISTAT Italy's inflation rate in March rose to the highest in more than 11 years, driven by gains in energy prices and a surge in the cost of food and housing. Consumer prices calculated by European Union standards rose 3.6 percent from a year earlier, up from last month's 3.1 percent rate, which had previously been the highest rate since the index was created in January 1997.

Consumer prices rose 1.6 percent in March from February, which is a very rapid rate indeed (annualised 18%). The rate of price increases has clearly accelerated and Italy - which has very low economic growth at this point (probably near zero, or worse) - could be said to be suffering from some variant of stagflation. This will not make it at all easy for the ECB to bring any kind of early reflief in the form of rate cuts (which could be just as important for their impact on the current high value of the euro which is crimping Italian exports, as for any easing of lending conditions) in the near future.

Italian transportation costs, which include gasoline, rose 1.4 percent from a month ago, and 5.8 percent from a year ago, based on the statistics institute's calculations. No breakdown was given of the EU-harmonized index. Prices of housing, water, electricity and fuel increased 4.4 percent from a year ago.

Food and beverage costs in Italy rose 0.7 percent from February and 5.5 percent from a year ago, led by increases in the prices of bread, cereal and pasta. Cereal costs rose 10 percent, bread was up 13 percent and pasta prices jumped 17 percent from a year ago. Fruit rose 6 percent and milk went up 10.5 percent.

Friday, March 28, 2008

France Consumer Confidence March 2008

Consumer confidence in France fell to a record low in March as accelerating inflation squeezes purchasing power. A gauge of consumer sentiment fell to minus 36, the lowest since the index was introduced in 1987, from minus 35 in February, Insee, the Paris-based national statistics office, said today.

Prime Minister Francois Fillon said this week the government is cutting its 2008 economic forecast to as low as 1.7 percent, citing the fallout from the U.S. housing recession. Accelerating inflation has deepened concern among French voters that President Nicolas Sarkozy will fail to fulfil his pledge to boost living standards, opinion polls have shown.

More than 80 percent of French people said they saw their purchasing power decline in the last 12 months, according to a poll last month by Paris-based Ifop institute. That was up from 65 percent in November and from 59 percent in January 2007.

France Retail PMI March 2008

European retail sales fell in March as rising fuel, utility and food prices left shoppers with less money to spend, the Bloomberg purchasing managers index showed. The gauge of sales growth in the euro region declined to a seasonally adjusted 48.2 from 52.4 in February. A reading below 50 indicates contraction. Sales also fell from 2007, according to the index, which is based on a survey of more than 1,000 executives compiled for Bloomberg News by NTC Economics Ltd.

In France, retail sales rose for the third month running, with the increase supported primarily by higher food & drink sales values. The rate of growth was weaker than the previous two months (the index slipped from 58.8 in February to 53.3), but nonetheless remained robust and in marked contrast to the contraction seen throughout Q4 of last year.

Italy Retail PMI March 2008

Well there aren't too many words in my vocabulary to describe this one. Italian retail sales fell through the floor in March - at least according to the Bloomberg NTC Purchasing Managers Index - and fell at the fastest pace in four years as national elections next month added to concern about the economic outlook.

The seasonally adjusted index of retail sales declined to 36.4 from 43.8 in February, according to a survey of 440 executives compiled for Bloomberg LP by NTC Economics Ltd. That's the lowest - as the most rapid rate of contraction - since the survey began in January 2004. The reading has now been below 50, the level that signals a contraction in sales, since February 2007.

Hiring by retailers fell in March for a third month according to the survey, and purchase-price inflation accelerated for a second month to a five-month high, ``with oil-related items and foodstuffs'' leading the gains.

Elsewhere in Europe, retailers are also struggling to rekindle demand. European retail sales fell in March as sales growth slowed in Germany and France, the euro area's two largest economies, according to NTC.

For the Bloomberg retail indicator, NTC compiled a representative panel of retail companies in Germany, France and Italy, which together make up 80 percent of total euro-region retail sales by value. The panel includes large, chain retailers as well as smaller stores.

On another front there are some signs that the coming elections may not produce the kind of decisive outcome many Italians were hoping for, at least according to this story in ANSA.

At the end of his post on the fall of the Prodi government my colleague Manuel Alvarez noted that "[...] it's quite possible that Italy will head to the polls later this year under the existing electoral system - with its well-known shortcomings - and that the government that emerges from that election may eventually find itself in a predicament similar to that of Prodi's outgoing cabinet."

Well this is precisely what seems to have happened, at least according to the ANSA report. As Manuel noted in a mail to me this morning:

"Of course, if that happens, Silvio Berlusconi will have no one to blame but himself: he wanted an early election under the current system, and he got it - but once again, his scheme may not entirely work out the way he expected. We shall see..."

Eurozone Retail PMIs March 2008

European retail sales fell in March as rising fuel, utility and food prices left shoppers with less money to spend, the Bloomberg purchasing managers index showed. The gauge of sales growth in the euro region declined to a seasonally adjusted 48.2 from 52.4 in February. A reading below 50 indicates contraction. Sales also fell from 2007, according to the index, which is based on a survey of more than 1,000 executives compiled for Bloomberg News by NTC Economics Ltd.

Italy was again the worst performing nation, with retail sales falling for the thirteenth consecutive and at the steepest rate in the survey history (the index slumped from 43.8 to a low of 36.4). Uncertainty regarding the current political situation was put forward by a number of retailers as being a possible cause of lower sales during the month.

In France, retail sales rose for the third month running, with the increase supported primarily by higher food & drink sales values. The rate of growth was weaker than the previous two months (the index slipped from 58.8 in February to 53.3), but nonetheless remained robust and in marked contrast to the contraction seen throughout Q4 of last year.

German retailers, meanwhile, saw a modest rise in sales for the second successive month, but the rate of increase was down slightly on the six-month high seen in February and weaker than that posted in France (the index fell from 52.1 to 51.5). Strong growth of sales in the food& drink sector sustained the overall index above 50.0.

Europe's economy is heading for its weakest growth in at least three years as rising credit costs and a U.S. slowdown squeeze companies and consumers. With inflation accelerating to its fastest rate in 14 years and salaries not showing exceptional growth, households may well further scale back purchases of clothing, electronics and cars etc.

European consumer confidence remained at the lowest in more than two years in February, according to the European Commission. Inflation in the euro area was 3.2 percent in February, the fastest since 1993, boosted by soaring food and energy prices. Crude oil has risen 30 percent to more than $100 in the last six months.

The European Commission and the European Central Bank have both cut their economic growth forecasts for 2008 in the past month, predicting the economy will expand by the slowest since 2005. The European Forecasting Network, a group of economic institutes, yesterday predicted a growth rate of 1.4 percent, the lowest since 2003.

Thursday, March 27, 2008

Spain New Morgtgages January 2008

According to the latest data from the Spanish Statistics Institute (INE), the average value of the mortgages signed in January decreased by a 1.9% year on year rate and reached 163,448 euros.

The value of mortgages creeated on urban buildings was over 21,357 million euros in January 2008, a year on year decrease of 25.7%. In the housing sector alone, capital loaned exceeded 13,395 million euros, 28.0% less than in January 2007.

There were a total of 138,527 new mortgages created in January 2007, a decrease of 23.59% year on year over January 2007.

On the other hand the number of morgages being modified for purposes of refinance jumped by 24.2 percent year on year.

98.3% of the mortgages created in January had a variable interest rate. Within the variable rate mortgages, Euribor was by far the most widely used reference interest
rate, being used in 87.6% of new contracts.

Spain Producer Prices February 2008

According to the INE data released earlier this week, producer prices in Spain were increasing at a year on year rate 6.6% in February, a very hefty clip, especially given the rate at which the economy seems to be decelerating.

The General Industrial Price Index registered an increase of 6.6% in February 2008 with respect to the previous year. The activities that most influenced this variation were Food and beverage products industry (11.0%) and Manufacture of coke and refined petroleum products (25.3%).

GFK Consumer Confidence Index april 2008

German consumer confidence unexpectedly rose slightly for the first time in three months as we enter April, as rising wages slightly boosted households' willingness to spend. GfK AG's forward looking sentiment index for April, based on a survey of about 2,000 people, increased to 4.6 from 4.5 in March, according to the Nuremberg-based market-research company today. What we can see from the chart is that while sentiment is now well down from the heights of the midddle of last year, it has - for the moment - stabilised somewhat.

The following extracts are from the GFK report which can be found in its entirety following the link above:

Consumer climate: stable developments with slight upward trend
The positive development of the indicators this month has resulted in a slight upward trend for the consumer climate. The overall indicator forecasts 4.6 points for April, which represents a minor improvement. The current greater tendency towards savings prevented a more substantial increase in the indicator. In the first three months of this year, the indicator has hovered at 4.5 points.

It would certainly be too soon to speak of a trend reversal. High rates of inflation and new record values for the US dollar and the price of crude oil are likely to stop consumers from immediately giving up their restraint in terms of consumption. For a trend reversal to materialize, prices will need to settle down in particular. This would put the focus back on positive conditions, such as the good situation in the labor market.

In view of current price trends and the continued high rates of inflation, the previous consumption forecast of 1.5% in real terms does not seem attainable. GfK is therefore revising consumption expectations for 2008 to 1%.

Economic expectations: restrained optimism
After the setback last month which amounted to a decrease of more than 14 points, the economic expectations of German consumers stabilized again in March. The indicator rose marginally by 0.4 points and now stands at 15.0 points.

A degree of uncertainty persists among German citizens with regard to economic developments. The effects of the US mortgage crisis, which have resulted in significant capital losses and the associated credit squeeze for major banks, have somewhat dampened optimism regarding the economy. The weak US dollar and the growing number of signs pointing towards recession in the USA are also depressing consumer sentiment. As consumers are currently unable to assess the extent to which these negative developments will ultimately affect the German economy, they have remained cautious.

Income expectations: collective wage agreements provide hope
Following the marked gains of more than 4 points in the prior month, the indicator for income expectations continued to climb in March. With an increase of 2 points, the rise remains lower than in the prior month. The indicator currently stands at 1.5 points and has returned to the positive range for the first time since September 2007.

The latest collective wage agreements in the metal industry and for train drivers, which were favorable from the point of view of consumers, have achieved the intended effect. It appears that hopes of also achieving a good outcome in the imminent negotiations are outweighing inflation-related concerns. Respondents are slightly more confident that wages and salaries will rise above the rate of inflation, making an increase in income possible in real terms.

Propensity to buy: signs of a slow recovery
The propensity to buy indicator has gone up again in March. However, the increase of almost 5 points means that the losses of the prior month can only partly be compensated. At currently -10.2 points, the propensity to buy in March is a good 2 points above the corresponding figure for the prior year. However, the propensity to buy indicator remains considerably below the long-term average of 0 points.

Despite ongoing fears of inflation, consumers appear more prepared to make major purchases. Nevertheless, some uncertainty remains in the wake of rising energy and food prices.

Wednesday, March 26, 2008

Italian Business Confidence March 2008

Italian business confidence declined to its lowest level in two and a half years in March as slowing economic growth and the euro's appreciation continued to weigh on orders and optimism. The Isae Institute's business confidence index fell to 89, the lowest since August 2005, from a revised 89.6 in February, the Rome-based research center said today.

A sub-index measuring Italian manufacturers' total orders fell to minus 16 from minus 13, according to today's report. Exporters are more pessimistic about their short-term sales outlook, with an index falling to 5 from 9 last month, according to a quarterly survey of exporters also released today.

``The fall in confidence is due above all to the contraction in orders,'' Isae said. ``In the first quarter of 2008, both current exports and the outlook for exports worsened.''

These factors prompted manufacturers to grow more pessimistic about Italy's economy in the coming months, according to a seasonally adjusted sub-index that fell to minus 30 from minus 24 in February, according to Isae.

IFO Business Confidence Index

German business confidence, as measured by the IFO index, rose again for a third month in March, adding yet more evidence that Europe's largest economy, even if it is not free from the effects of the global slowdown, is at least weathering the storm better than might have been expected. The Munich-based Ifo institute reported this morning that its business climate index, based on a survey of 7,000 executives, increased to 104.8 from 104.1 in February.

Ifo's gauge of expectations rose to 98.4 from 98.2, while the index of sentiment on current conditions advanced to 111.5 from 110.3.

Exports jumped 3.8 percent in January, unemployment fell to a 15-year low of 8 percent in February. German companies are benefiting from booming demand for their goods in emerging economies in Eastern Europe and the recent surge in demand in Russia. However the rate of export growth is predicted to slow to 5 percent this year from 8.5 percent in 2007 according to the BGA exporters' lobby in a press release on March 12, and even this slowdown would be noted, since it is export growth which is holding up the whole deifice at this point, and then, should the problems which are now emerging in the East European economies turn out to be more severe than anticipated, well then Germany would be very exposed. But for now, sufficient unto the day is the good news thereof, modest as it may be.

Tuesday, March 25, 2008

Italian Consumer Confidence March 2008

Italian consumer confidence fell to its lowest in nearly four years in March as rising prices and slowing economic growth increased pessimism among growing numbers of Italians. The Rome-based Isae Institute's index, based on a survey of 2,000 families, fell to 99 from a revised 102.8 in February. This reading is the lowest since May 2004.

Italians have been steadily cutting back on their spending, which makes up two-thirds of the economy, as the continuing rise in the cost of food and transportation reduces their disposable income. ISAE predicts the Italian economy will grow by as little as 0.5 percent this year, the slowest pace since 2003.

The sub component concerning optimism about the current economic situation fell to a 14-year low of minus 132 from minus 118, ISAE said. The number of Italians who are ``very concerned'' about rising prices is at a four-year high.

Obviously overhanging the whole economic climate is the current election campaign, which was triggered by the collapse of Prime Minister Romano Prodi's government in January after 20 months in power. Both leading candidates, two-time premier Silvio Berlusconi and former Rome Mayor Walter Veltroni, are promising tax cuts to help revive growth, although given the large fiscal constraints that this growth slowdown will present, it is far from clear where any of these will come from.

German Wage Costs Q4 2007

The latest quarterly wages data from the German Federal Statistics Office show that despite the continuing resilience in the German economy (see this last post), hourly wages in Germany are far from keeping up with the rise in inflation.

According to the latest data release, in the fourth quarter of 2007 employers in the industry and service sectors paid a calendar-adjusted 1.1% more per hour worked than in the same quarter a year earlier. It is important to notice here that the two main components of labour costs showed slightly different trends. While the costs of gross wages and salaries were up 1.5%, non-wage costs were down 0.4%. Compared with the previous quarter, the costs of one hour worked increased a seasonally and calendar-adjusted 0.4%.

In 2007, labour costs in the industry and in service sectors increased a calendar-adjusted 0.9% over the previous year. The index of gross wages and salaries was up by 1.3%. By contrast, the index of non-wage costs decreased 0.5%. The decrease is due to the reduction in employers’ contribution rates for unemployment insurance (from 3.25% in 2006 to 2.1% from 2007) a decrease which more than offset the increase in employers’ contribution rates for statutory health insurance (up from 6.6% to 7.0%) and for pension insurance (up from 9.75% to 9.95%) in 2007. The basic philosophy behind this restructuring was a to make some sort of trade-off between a VAT rise and a reduction in the contributions wedge on wages in an attempt to create employment (which obviously has to some extent worked on the employment side, although it clearly has not worked on the household consumption and CPI side).

What all this means in practice is that the German total wage cost increase data for 2007 is somewhat lower than the actually underlying wages only trend, and this will be noticed in Q1 2008 as the base effect drops out. But still, if the trend is 1.3% rather than 0.9%, this hardly constitutes a wages explosion. The question is why it should be that growth is being sustained, unemployment is falling, and yet real wages are alos falling. I think I offer some part of the explanation in this post here, and the fact that a very similar state of affairs now exists in Japan would seem to reinforce my argument (and this post here).

Also the latest quarterly data from Eurostat - which uses a slightly different methodology - shows that among the EU Member States for which data were available for the fourth quarter of 2007 the smallest annual increases in hourly labour costs were observed in Luxembourg (1.0%) and Germany (1.5%), ie that Germany had the second lowest, and a far far cry from the other end of the scale, since the highest annual rises were registered in Latvia (30.1%), Romania (21.6%), Estonia (20.7%) and Lithuania (20.5%).

Germans are feeling the pinch. Although the country's economy has been growing steadily in recent years, the man in the street is, in fact, worse off, as average incomes have failed to keep up with inflation. In fact real wages - which I have derived by simply subtracting the CPI rate from the wages data - have been negative since at least the start of 2006, ie through virtually the whole of the current expansion.

This picture is also confirmed by new figures released by the Finance Ministry last week, which showed that over the last three years prices have been rising faster than disposables incomes - and that the drop in real wages has been accelerating.

The figures, which were released by the government in response to an inquiry from the opposition Free Democratic Party (FDP), show the average worker is getting worse off at an increasing rate. Published in last Friday's Süddeutsche Zeitung, the numbers basically show that an average family with two children was 0.4 percent richer in 2004 compared to the previous year. However, in 2005 and 2006 average disposable incomes fell by 1.1 percent. Last year, the fall increased to 1.3 percent. Workers without families suffered similar falls in income.

Of course, the idea that their purchasing power is declining won't come as any great surprise to most Germans. Relative to one year ago, prices for a number of goods and services have risen drastically. Petrol prices have shot up by 10 percent with diesel rising by 16 percent relative to Feb. 2007. Electricity is likewise 7 percent more expensive and natural gas prices are set to rise in April. Even a bag of groceries costs on average 7.8 percent more than a year ago according to the Federal Statistics Office who said last Friday that the inflation rate hit - as measured by the EU harmonised index was up by 2.9% percent in February.

The bad news comes on the heels of a report by the German Institute for Economic Research that Germany's middle class is continuing to shrink. Whereas the group made up a solid 62 percent of German society for decades, only 54 percent are now considered to be middle class.

Thursday, March 20, 2008

Italy Employment and Unemployment Q4 2007

Italy's unemployment rate on a seasonally adjusted basis remained unchanged in the last quarter of 2007, bringing to an end a run of over three years when the rate has been declining, a we could read this as just one more sign that the economy is at stall speed as slowdown starts deterring companies from hiring.

The unemployment rate held at 6 percent, and this was the first time had it failed to drop since the last quarter of 2004, the National Statistics office Istat said today. The average annual rate still, however, remains at its lowest level since 1993.

Joblessness among Italians between the ages of 15 and 24, which has been trending down slightly over the past two years, rose 0.6 percent in the fourth quarter from a year earlier.

However these record-low unemployment rates in Italy mask significant regional disparities in joblessness. The jobless rate in Italy's industrial north was 3.4 percent in the fourth quarter, compared with almost 11 percent in the south of the country. The number of jobless Italians who have given up looking for work fell by 3.1 percent to 1.7 million from a year earlier.

Italian unemployment has declined steadily since 1999 after the introduction of changes which effectively made it easier for companies to hire part-time and temporary workers who don't enjoy the same benefits and job security as full-time staff and can be more easily fired when financial constraints force cuts. This ease of hiring and firing is reflected in the data, with workers with temporary contracts working full-time being down of the same quarter a year ago for the first time in at least three years.

Part time working has also grown steadily since the reform, and nearly 1 in 4 jobs in Italy is now either part time or temporary.

And growth in temporary and part time working has been especially pronounced among the over 35 age group. Unfortunately ISTAT don't provide detailed enough data here, but I think it would be reasonable enough to assume that a significant share of these workers are over 50.

Moreover, after many years of very low fertility fewer and fewer Italians are now joining the workforce. Two- thirds of the annual increase of 308,000 new workers in the fourth quarter were immigrants, and the other third can be effectively accounted for by an increase in employment in the 55 to 64 age group. If you look at the chart below (which is slightly illegitimate - but only slightly so - since I have derived it by subtracting the number of foreign workers and the number of workers from 55 to 64 from total employment, and some - even if very few for their age profile - migrant workers are in the 55 to 64 age group) we can see that the number of under 55 year old Italians in the workforce has been virtually stationary during the last two years, years of comparatively strong economic growth (in Italian terms) and record low unemployment. I think it is very easy to see some sort of ageing population effect in all this.

So, where does that leave us? Well with a not especially strong underlying labour market dynamic I would say, and that despite the evident progress that has been made in bringing down unemployment. And again, if you look at these numbers I think it isn't too hard to see some of the reasons which help to explain why Italy is suffering from rather weak consumption and low productivity growth.

Wednesday, March 19, 2008

Colonial Deal Off, SEOP Seeks Creditor Protection

Investment Corporation of Dubai (ICD) said today that it was not going to buy Spanish real estate firm Colonial after it failed to reach an agreement with the company's creditors. ICD did, however, leave the door open to future negotiations.

"If there was a possibility, beyond the conditions set on March 11, to reach an agreement with Colonial, ICD would consider such a possibility and would communicate it immediately," the fund said in a statement to Spain's stock market regulator.

But Colonial's shareholders, Luis Portillo and the Nozaleda family, also in a statement to the regulator, sounded a more pessimistic note. They said ICD had not reached a deal with the creditors "(and) no expectation exists that such an agreement will be reached." They added that they continue to search for a "satisfactory solution" for Colonial and its shareholders.

Meanwhile SEOP, Spain's 13th biggest construction firm, said yesterday that was seeking creditor protection due to the fact that its own clients - many of whom are property developers - had fallen behind on payments and bank financing was harder to come by.

Spanish property companies have piled up huge debts over the last decade in a bid to make the most of a real estate boom which was fuelled by a cocktail of low eurozone interest rates and high domestic economic growth. However, many property firms are now having to renegotiate loans they took out to buy land, build houses and buy rivals to diversify into other countries or areas of real estate.

Some, like Valencia-based Llanera have already gone bust while others like Habitat and Martinsa Fadesa have had to fight an uphill battle to try to restructure their debt. But the option of selling assets to pay debts is growing harder by the day as banks cut back on mortgages and potential buyers negotiate prices down as they start to feel that the selling party is coming under pressure.

SEOP had a turnover of 434 million euros ($686 million) and a net profit of 6.5 million in 2006. In taking this step it becomes the first major supplier to have been hit by the dwindling cash flow in the sector. The company did not disclose how much its debts amount to.

Non Performing Loan Ratios

Non-performing loans held by Spanish banks and savings banks rose by about 2 billion euros ($3.16 billion) in January from December to 16.23 billion, according to data published on Monday by the Bank of Spain.

The figure was 6.5 billion euros above the total in January 2007.

In January 2008, bad debts, including those held by credit cooperatives, represented 0.955 percent of loans worth a total of 1.7 trillion euros given to individuals and companies.

Bankers and regulators expect Spain's non-performing loan ratio to as much as triple from all-time lows this year as economic growth slows and unemployment rises.

A breakdown of January's figures showed that banks lent 770 billion euros with a bad debt percentage of 0.858 percent while savings banks have lent 838.5 billion euros with a non-performing loan level of 1.032 percent.

Last year, Spain's biggest bank said its bad loan rate rose to 0.95 percent from 0.82 percent in 2006 while its leading savings bank La Caixa had a non-performing loan rate of 0.55 percent, up from 0.33 percent a year earlier.

The Bank of Spain said cooperative banks had credits of 91.5 billion euros and bad debts totalling 972 million.

Consumer credit agencies have issued loans to the tune of 58.5 billion euros by the end of January with a bad debt level of 3.1 percent.

Spain's bank and savings bank bad loan ratios are coming into line with other big European economies like Britain where the number of mortgages three or more months in arrears was 1.1 percent in 2007, according to the Council of Mortgage Lenders.

However, it is still well below countries like Greece where the central bank has said it will ask banks to bring down their non-performing loan ratio to 3.5 percent from 5.4 percent in 2006.

Update Wednesday 26 March 2008

Real estate company Cosmani joined the growing list of Spanish property firms filing for administration today. In a statement on today, Cosmani said five of its 22 units filed for creditor protection last week, around the same time as construction company SEOP had to go into adminstration because clients were not paying their bills. Cosmani's own statement is not without some significance:

"Cosmani's solvency is not in doubt as its asset value is much more than its total debt, but business has suffered because of adverse conditions in the property and financial sectors that have caused a temporary liqudity shortage,"

The group claim banks were trying to call back loans and bank guarantees, some of them ahead of maturity. Cosmani said it had 350 million euros ($545 million) of debt, almost all of it with banks, while its assets were valued at 1.6 billion euros. Net equity was 74 million euros.

Sector specialists are quoted in the press as saying they expect several property companies to file for protection under a new Spanish insolvency law which allows firms to draw up a "viability plan" including asset sales and debt renegotiations rather than going bust, which hurts banks more than agreeing to wait for repayment. Effectively Spanish property companies are are being squeezed on both sides at the moment with sales drying up while banks are trying to cut their risk exposure to the property sector, particularly in the wake of the U.S. subprime crisis.

A significant list of other property companies - from unlisted Habitat to blue-chip Colonial - are locked in talks with their banks to restructure billions of euros of debt they piled up to buy land and rivals during the decade-long housing boom. Martinsa-Fadesa is having to renegotiate its 5.1 billion euros debt while unlisted Detinsa is also trying to sell assets and change its debt structure to avoid insolvency.

Martinsa Fadesa said earlier today it expected to get approval later this week from all lenders on renegotiating terms of its 5.1 billion euro ($8 billion) debt load.
Martinsa, which is already in default, wants lenders to agree to defer debt and interest payments. It said in a statement to the Spanish stock market regulator that missed payments could be folded into a new agreement.

Martinsa has been struggling with its creditor banks, hedge funds and other holders of its debt in an attempt to reach a restructuring agreement. Debt agreements need to be signed by all creditors.

The new agreement is likely to cover only a part of the 5.1 billion euros debt pile, not its entirety as the company had originally hoped, according to widely quoted sources. Martinsa failed to make an interest payment this month and did not win a waiver that would have extended an interest payment of 362 million euros, due on March 17. Talks to reach a deal to save the firm from insolvency remain "very difficult," a banking source close to the talks was quoted as saying earlier today.

The negotiations, initially set to be finalised today, will be extended over the next few days. Ahorro Corporacion Financiera, La Caixa, Caja Madrid and Morgan Stanley are lead arrangers of the company's 5.1 billion euro loan, and hold more than half of it. Other debtholders include hedge funds and Collateralised Loan Obligations (CLOs) that control "less than 10 percent" of the debt.

Interestingly, at just about the same time as all this was taking place in Spain, Spanish developer Martinsa Fadesa was busy starting the construction of its first major project in Bulgaria, Stroitelstvo Gradut (Construction and the City) weekly reported. The "first-sod" ceremony of the Modera Residence residential complex took place on March 18.

The complex is located in Sofia’s Vitosha neighbourhood, at about 200 m from the ring road and Simeonovsko Chaussee Blvd, and will have a gross actual area of about 54 000 sq m. Architectural project was prepared by Stroyconsult 999 Ltd, with leading designer Yuri Angelov; general contractors are Livel and Hydrostroy-P; the consultant is Nevon Consult Ltd. The neighbourhood has been one of the most actively constructed areas in recent years. Another two new gated communities, Preslav and Buena Vista, are located in the vicinity.

Now why the above is to some extent worthy of mention is that it highlights the extent to which enbattled Spanish property companies have been trying to save their situation by turning east, but it is not clear at this point whether this will improve or simply aggravate their situation, as the construction sectors in some of the more seriiously "overheated" east european economies - like Bulgaria and Romania may well themselves experience and important property "correction" some time in 2008.

Sunday, March 16, 2008

German Exports and German Growth Resilience in January and February 2008

Evidence is now mounting that the German economy has managed to find some sort of second wind, and at this point in time continues to endure the global downturn rather better than might have initially been expected. Perhaps the first clear indication that the downward progress of the German economy had been arrested and that the economy had to some extent stabilised came with the February reading on the EU Business Sentiment Index, which although remaining at rather lower levels than those registered during most of 2006 and 2007 was - at 103.7 - nonetheless up slightly on the January reading of 103.1. That is to say there was some evidence that the rot had been stopped, at least for the time being.

This confidence reading has been followed by at worst a flattening out and at best a slight uptick in a whole slew of German indicators like the IFO and Zew indexes, the GFK consumer confidence index, the February manufacturing and services purchasing managers indexes, and the performance in retail sales. All these point more or less in the same direction. So what is causing this rather unexpected resurgence in life?

Exports Lead the Way

Well since the German economy is basically export and not domestic-consumption lead, perhaps our instincts should tell us that export performance would be the best place to look to try and get a handle on what has been happening, and it seems that if we follow our instincts and do just this, then we will find that at least on this occassion our intuitions have not failed us, since according to the lates provisional data from the Federal Statistical Office, a decisive improvement can be noted in January's export performance over the December 2007 one, and indeed January marks the first month of improvement after several months of weakening on the export front.

In fact in January 2008 Germany exported goods to the value of EUR 84.4 billion while imported goods to a value of EUR 67.3 billion (thus having a trade surplus of EUR 17.1 billion). What this means is that German exports were up 9% year on year (and imports up 10.2%) when compared with January 2007. When allowing for calendar and seasonal factors, German exports increased by 3.8% and imports by 4.2% over December 2007.

As we can see fromn the above chart, German exports staged a definite recovery in January, and this recovery is thoroughly consistent with data readings we have been getting on other (previously mentioned) fronts, like the IFO and ZEW indexes, and the manufacturing and services PMIs. Curiously this situation is also consistent with results we have been seeing for exports in Japan (and for more comparisons between what is happening in Germany and what is happening in Japan see my Q4 2007 GDP revisions post, and Claus Vistesen's Is Japan Resisting one).

It is important to stress that this development does not by any means constitute a 100% U turn for the German economy, but it does mean that a pretty effective short term brake has been applied to the downward movement in economic activity, and it now remains to be seen how this deceleration/acceleration struggle pans out over the next two to three months. The broad brushstroke conclusion we might draw is that this rebound is unlikely to be a permanent one, but for the time being it is cushioning the German economy to some considerable extent.

A large share of German growth is driven by exports, and in particular by the foreign trade balance which showed a surplus of EUR 17.1 billion in January 2008 up from the EUR 16.4 billion achieved in January 2007.

It is also important to be aware that to get GDP growth Germany needs not only to maintain the balance, but increase it and to keep increasing it, since the correlate between GDP growth and export growth is a pretty strong one. But it is just in Germany (and Japan's) anility to keep increasing the size of the surplus as we move forward that their whole growth dynamic may falter.

In January 2008 Germany exported EUR 54.3 billion of goods to EU Member States, while it received EUR 43.1 billion worth of imports from EU countries. Compared with January 2007, dispatches to and arrivals from the EU countries increased by 7.7% and 11.2%, respectively. Goods to the value of EUR 36.2 billion (+6.3%) went to euro area countries in January 2008, while imports from those countries were EUR 29.9 billion (+10.0%).

Goods to the value of EUR 18.1 billion (+10.5%) went to EU countries not belonging to the euro area in January 2008, while goods arriving from those countries had a value of EUR 13.2 billion (+13.9%).

Germany exported goods to the value of EUR 30.0 billion to and imported goods to the value of EUR 24.2 billion from countries outside the European Union (third countries) in January 2008. Compared with January 2007, exports to third countries were up by 11.5% and imports from those countries by 8.5%.

Exports 2007

In 2007 Germany imported goods to a value of 772,511 million euros as compared with 733,994 million euros in 2006, an increase of 5.2%. In 2007 Germany exported goods to a value of 969,049 million euros as compared with 893,042 million euros in 2006, an increase of 8.5%. In 2007 the goods trade surplus was 196,538 million euros as compared with 159,048 million euros in 2006. This means there was an increase of 23.6% in the trade surplus between 2006 and 2007, and it is the trade surplus that to a large extent drives German GDP growth.

It's Where The Exports Are Going That Matters, Silly!

In 2007 about three quarters of German exports went to European countries, and 65% wentto the member states of the European Union. The second sales market after Europe was Asia with a share of about 11%, followed closely followed by America, with a share of approximately 10%. So Europe is the key to German growth, this is both evident and a very clear indication of why German exports have been so resilient to the rising value of the euro. To put things in perspective in 2007, and despite all the talk about the "China factor" Germany in fact exported effectively the same quantity of products to the Czech Republic ( 26,026.6 million euro) - population circa 10 million, as it did to China (29,922.7) - population circa 1.3 billion. meantime the quantity of products exported to the United States actually fell between 2006 and 2007.

Below you will find lists of German exports by countries for 2006 and 2007 for the leading destinations. A quick look through the two lists is revealing. Of particular interest are, for example, the fact that the numbers for China only increased by 8.7% on the year (up from 27,520.6 million euro in 2006 to 29,922.7 million euro in 2007, a difference of 2,402.1million euro) while exports to the Czech Republic (up from 22,255.3 million euro in 2006 to 26,026.6 million euro in 2007 or an incease of 3,771.3 million Euro) were rising at almost double the Chinese rate (up by 16.9%). The importance of United States as an export destination, on the other hand, declined, since exports there were down from 78,011.4 million euro in 2006 to 73,356.0 million euro in 2007, a decrease of 4,655.4 million Euro or 6%. Poland, which is another important destination for German exports was up from 28,820,4 million euro in 2006 to 36,083.2 million euro in 2007. An increase of 7,262.8 million Euro or 25.2%. Spain was also up considerably (as was Italy), rising from 42,159.2 million euro in 2006 to 48,157.7 million euro in 2007, that is an increase of 5,998.5 million Euro or 14.2%. The Russian Fderation is up from 23,371.8 million euro in 2006 to 28,185.2 million euro in 2007, that is an increase of 4,813.4 million Euro or 20.6%.

Now the list I have just gone through is scarecly a randomly chosen one. The decline in importance of the United States as an export destination for both Germany and Japan - which are the world'd No 3 and No2 economies respectively, and are both export driven - surely has some implications for the whole decoupling-recoupling debate. Also, the dependence of the German economy for exports growth on Poland, Czech Republic, Russia, Italy and Spain - all of which may have economic issues in 2008 of greater or lesser importance - is surely more than a minor detail, and the evolution of the east european and latin economies needs to be closely monitored for what they can tell us about the future path of the German one.

Whole Year 2007 German Exports by Country in Million Euro

France 93,860.6
United States 73,356.0
United Kingdom 70,998.8
Italy 65,148.0
Netherlands 62,373.5
Austria 52,762.5
Belgium 51,407.0
Spain 48,157.7
Switzerland 36,355.3
Poland 36,083.2
China, People's Republic of 29,922.7
Russian Federation 28,185.2
Czech Republik 26,026.6
Sweden 21,677.6
Hungary 17,304.9
Denmark 15,358.2
Turkey 15,082.7
Japan 13,075.2
Finland 10,291.4
Korea, Republic of 8,733.0
Slovakia 8,550.3

Whole Year 2006 German Exports by Country in Million Euro

France 86,093.0
United States 78,011.4
United Kingdom 65,340.5
Italy 59,971.4
Netherlands 55,876.5
Belgium 49,249.2
Austria 48,921.1
Spain 42,159.2
Switzerland 34,725.7
Poland 28,820.4
China, People's Republic of 27,520.6
Russian Federation 23,371.8
Czech Republik 22,255.3
Sweden 18,881.2
Hungary 15,870.8
Turkey 14,389.9
Denmark 14,020.4
Japan 13,860.9
Finland 9,299.6
Korea, Republic of 8,476.2
Slovakia 7,621.3
Portugal 7,460.5

In Conclusion

So what I want to say in this post is that it is now quite evident that some slight easing in the downward path of the German growth process is now taking place, the recent data are simply too consistent on this front to be ignored. As I mentioned at the start, the IFO reading was not as weak as might have been expected, the GFK consumer confidence reading remained stationary, unemployment continued to fall on a seasonally adjusted basis, while the January retail sales data and February retail PMI readings indicate an underlying expansion in German retail sales for the first time in several months.

Of course how long this process will last, and how important the turnround will prove to be, is very hard to say at this point. Looking at the general economic environment I wouldn't be betting on any kind of very strong upswing, but the numbers are interesting, and I wouldn't be surprised at all to see the recovery in the January export situation being carried over into February. An Eastern Europe effect perhaps? Certainly several economies are still accelerating there, almost to overheating, and the strong growth rates in German exports to Poland, the Czech Republic and Russia are unmistakable signs of something.

It is also significant that we can see some slight consumption effect in provisional results released by the Federal Statistical Office for turnover in the German retail trade in January, with sales up by 2.7% in nominal terms and 0.6% in real terms over January 2007. When adjusted for calendar and seasonal variations the January turnover was in 1.9% higher in nominal terms and 1.6% in real terms over December.

Now this is not an earth-shattering change, but it is significant. If we add to these results the latest reading on the Bloomberg retail sales purchasing managers index, which rose to 52.1 in Feb from 44.2 in Jan (according to data released yesterday by NTC economics), then obviously we be reasonably confident that the sales climate has improved somewhat. In fact February was the first month in almost a year when German retailers anticipated that their future sales performance would exceed their initial plans. The last time the retail PMI registered a monthly sales expansion was back in September 2007.

As I say at the start of this post, it is very hard to decide how to read all of this, but I imagine everything will become clearer as the days pass. One thing we should not be expecting though is any large and significant expansion in private domestic consumption to prop the economy up when exports do finally falter. Overall final domestic consumption expenditure now constitutes an almost permanent impediment to German economic growth. In particular we might note how final consumption expenditure by private households fell markedly (–0.8%) in Q4 2007 and to this weak private consumption was added a reduction in government final consumption expenditure, which had been increasing slightly during the first three quarters, but which also was down 0.5% in the fourth quarter when compared with the third.

As can be seen in the chart above, German private consumption has not proved able at this point to recover from the pre VAT increase surge in Q4 2006. Will the decison to raise taxes to try to "painlessly" address ageing population related fiscal problems finally turn out to have been one of the worst errors of economic judgement in recent European policy making? It certainly look this way, but at the end of the day only time will tell.

Wednesday, March 12, 2008

France Inflation February 2008

France's inflation rate remained at a 12-year high in February as energy and food costs reached records. Consumer prices climbed by an annual 3.2 percent, the same as in January, based on European Union-harmonized methods, Insee, the national statistics bureau, said today in Paris. That's the fastest pace since 1996, when Insee began reporting the data. Prices increased 0.2 percent from January.

French energy prices climbed 18 percent from a year earlier in February and food rose 4.8 percent, today's report showed. Services such as health care increased 2.2 percent.

The price increases have affected consumer morale, sending confidence to a record low last month.

It has also hurt the popularity of French President Nicolas Sarkozy, who made purchasing power the centerpiece of his presidential campaign. Voters dealt him a setback in the first round of local elections March 10, preferring candidates from the opposition Socialist Party and its allies.

Italian Government Halves the 2008 Growth Forecast

We still of course are without detailed information on Italy's fourth quarter GDP performance (that is we really don't know whether or not Italy has entereda recession) but we do know that those who may well have seen some summary of the details are busily revising down there 2008 growth forecasts. The latest to join this list is the Italian Government itself, who today cut their 2008 economic growth forecast by more than half.

The Italian economy, which is still Europe's fourth-biggest, will grow at a rate of only 0.6 percent this year Finance Ministry said today in a prepared statement. That's down from a forecast of 1.5 percent in December.

The makes the Italian government even more pessimistic about Italy's coming growth performance than the European Commission or Confindustria (Italy's largest employers' organisation, who last month cut their 2008 forecast to 0.7 percent, a prediction which was later matched by the European Commission.

After lagging the EU average for more than a decade, Italy looks like it may well have the slowest-growing economy in the region this year, although we need to see what the final numbers turn out to be in some other weakening economies like Ireland, Spain, Greece or Portugal before we rush to too many conclusions here.

Most importantly this weak growth is likely to put increasing pressure on Italy's budget deficit, which the Finance Ministry now predict will rise to 2.4 percent of GDP in 2008, more than the 2.2 percent originally predicted but still under the European Union ceiling of 3 percent, if the target is achieved. The shortfall narrowed last year to 1.9 percent of gross domestic product, the least since 2000, according to ISTAT on Feb. 29. That's about half the 2006 deficit of 3.4 percent.

As I already noted in a post last week, the heightened risk aversion which is likely to prevail in global credit markets during 2008 has already sent the yield differential on Italian government bonds soaring, and this situation can not only be repeated but indeed get worse. And then there are the ratings agencies to think about. The problem here is that if you cry wolf often enough one of these days you really are going to get caught short, and Italian finances are now running dangerously near to that limit were a small problem turns into a serious issue.

Adding to the problems this time round is the fact that growth is steadily grinding to a halt at a time when the inflation rate is at an 11-year high of 3.1 percent. This situation of effective "stagflation" makes it very hard for the ECB to bring any meaningful relief on the interst rate front (which would also serve to loosen the euro-dollar) without bringing its credibility into question.

And to top it all, of course, we have the collapse of Prime Minister Romano Prodi's government on Jan. 24 after only 20 months in power. The uncertainty which this produces also helps muddy the economic water even more than it would otherwise be. Both leading candidates in the election campaign, two- time premier Silvio Berlusconi and former Rome Mayor Walter Veltroni, are promising tax cuts to help revive growth, but it is hard to see where the money for any of these tax cuts can come from when the country is going to find it hard enough to keep the deficit itself from rising even with the status quo being preserved.

ISAE Revise Down Italy's 2008 Growth Forecast

Italy's economy will expand at the slowest pace in five years as "external shocks" such as record oil prices and the strong euro impact consumers and businesses, the Isae research institute said. Europe's fourth-biggest economy will grow by 0.5 percent this year, Rome-based Isae said. That's down from their October forecast of 1.4 percent and would be the weakest rate of growth since 2003.

Oil prices above $100 a barrel have driven euro-region inflation to 3.1 percent, the highest rate in 11 years, and saddled households with higher energy bills and left them with less money to spend. At the same time, exporters are struggling to sell overseas because the euro's 18 percent rise against the dollar in the past year make euro-denominated goods expensive in the U.S., Europe's biggest trading partner.

Italy's Finance Ministry expects growth of 0.6 percent this year, while Confindustria, Italy's largest employers' group, cut its forecast last month to 0.7 percent, a prediction matched by the European Commission.

After lagging behind economic growth in most other EU countries for more than a decade, Italy is likely to be the slowest-growing economy in the region this year.

According to ISAE Italy's budget deficit is expected to rise to 2.7 percent of gross domestic product, more than the 2.6 percent formerly predicted, though still under the European Union ceiling of 3 percent. The deficit narrowed last year to 1.9 percent of gross domestic product, the lowest since 2000, the Rome-based national statistics office said Feb. 29. That's about half the 2006 deficit of 3.4 percent.

Monday, March 10, 2008

Italian Industrial Output January 2008

It seems Italian industry is experiencing a slight recovery, since Italian industrial production in January rose the most in more than a year, led by demand for consumer goods such as clothing and food. Output was up 1.3 percent on Deecmber 2007, the most since December 2006 and the first increase in five months,and rose a workday-adjusted 0.5 percent from January 2007.

Production of consumer goods rose 4.1 percent from December as the output of durable goods like refrigerators increased 4.3 percent. The output of non-durable goods rose 4 percent. Manufacturing of clothing jumped 5.9 percent from a month earlier, while that of food and drinks rose 4.9 percent.

The latest manufacturing data from Europe - including the PMI data I posted yesterday - point to economic growth in the 15-nation euro region holding up in January and February - even as record oil prices and the euro's strength have damped the outlook. Italy and Spain are struggling more than France and Germany. Consumer optimism and business confidence are at the lowest in two years in Italy and the economy is set to expand less than the European Union average for a 13th year in 2008.
Manufacturing also picked up in France and Germany, Italy's biggest trading partners. Production in Germany, Europe's largest economy, jumped 1.8 percent in January while French output increased 0.5 percent, separate reports showed.

Sunday, March 09, 2008

France Unemployment Q4 2007

France's unemployment rate declined more than expected in the fourth quarter of 2007 - falling to 7.8% - as measured by the labour force survey methodology, sustaining in the process consumer spending to some extent as economic growth slows.

The jobless rate dropped from a revised 8.2 percent in the previous quarter, Insee said today in Paris. Excluding France's overseas territories, the rate fell to a 24-year low of 7.5 percent from a revised 7.8 percent, based on International Labor Organization standards.

The French rate of economic growth fell in the fourth quarter and the International Monetary Fund cut its growth forecast to 1.5 percent this year from 1.9 percent in 2007. President Nicolas Sarkozy is counting on increased hiring to boost his popularity in municipal elections which are due this month.

Sarkozy's popularity has tumbled to the lowest since he took office in May as rising prices hammered consumer confidence. His approval ratings fell 4 percentage points to 38 percent this month, compared with 65 percent in July, a CSA/Le Parisien/i-Tele opinion poll showed today.

Among the population aged 15-64, 64.8 percent had a job in the fourth quarter, up from 64.4 percent in the third and 63.8 percent a year earlier, today's report showed. The previous quarter's overall rate was revised down from 8.3 percent and the mainland rate from 7.9 percent.

Eurozone Manufacturing and Services PMIs February 2008

The February reading on the RBS/NTC Eurozone Manufacturing PMI - Purchasing Managers' Index - (a composite indicator designed to provide a single-figure summary of business conditions across the eurozone) registered 52.3 . The PMI was in line with the earlier flash reading and down from 52.8 in January, signalling a slight weakening in the rate of expansion to the second weakest level registered in the past two-and-a-half years. PMI readings among the big-four euro nations showed the widest variation for seven-and-a-half years, with continued solid growth in Germany and, to a lesser extent, France contrasting with near-stagnation in Italy and an accelerating rate of contraction in Spain. The PMI for Italy hit a two-and-a-half year low while Spain saw the sharpest rate of contraction since December 2001.

Of the big-four countries, only Germany saw an acceleration in output growth, with German manufacturing activity weakening slightly in February - to 54.3 from 54.4 in January - but remaining robust, with employment growth holding near the strongest level on record. NTC said its measure of employment growth in the manufacturing sector fell to 55.3 in February, just below January's 55.6, which was the highest since the survey began in April 1996. A gauge of output advanced to 56.0, the highest since September, from 55.7.

However, there were signs the pain being caused to exporters by the strong euro was worsening, and the index of new export orders slipped to 52.5 from 52.7 while a measure of input prices jumped to 65.1, the highest since July, and up from 62.8 in January. So factory gate price inflation is on the way up as manufacturers evidently seek to pass through some of their higher raw material and energy costs to clients.

In France a dip in foreign orders and rising inflation dragged on French manufacturing activity in February the survey showed. The NTC/CDAF Index slipped to 53.8 in February from 53.9 in January, but kept above both the 50.0 mark separating growth from contraction and the series' long-term average of 53.1.

A sub-index for output fell to 56.0 in February from 56.4 in January, hitting its lowest point since November 2007. Chief NTC Economist Chris Williamson said France's manufacturers still lead Germany, Spain, and Italy in output, but warned the months ahead could present more problems.

Domestically, hiring in France picked up to its highest level since last July as companies took on staff to keep up with backlog of work. This is broadly consistent with the positive employment data we have seen coming out of France of late, and seems to suggest the contraction in umemployment will continue, at least for the time being.

Inflation concerns also rose in the February survey, with the input price index rising to 68.8 from 68.4 in January to reach its highest level since July 2007 and the output price index climbing to a 12-month high of 58.6 from 57.8. Rising prices have been the main complaint for French consumers and have driven recent falls in morale and spending.

Italian manufacturing growth slowed in February, as orders fell for the second month running and exports stagnated, and the NTC/ADACI Index came in at 50.6, down from January's 50.8.

Export orders -- which had been relatively buoyant and offsetting low domestic demand -- stagnated for the first time since May 2005, reflecting the effect of a strong euro and reduced demand for Italian consumer goods in foreign markets. In February the overall new orders sub-index remained at 49.4 and output growth slowed to 51.3 from 51.8, with output of consumer goods contracting. The survey also had evidence that manufacturers themselves were preparing for a sustained slowdown. The employment sub-index fell into negative territory (49.2) for the first time since last September, indicating companies were tightening their belts. Business confidence hit a 28-month low in February, according to economic think tank ISAE, with consumer goods makers particularly gloomy amid falling orders.

Spanish manufacturing activity contracted again in February, posting its weakest performance in over six years, according to last Monday's NTC Purchasing Managers Index (PMI). All five component indices of Index (PMI) pointed to worsening conditions as both production and new orders fell in February following the modest growth reported in January.

The headline PMI, which measures the general health of Spanish manufacturing, fell to 46.7 -- its lowest since December 2001 -- from 49.8 in January, pushing it further below the 50.0 mark separating growth from contraction. General Industrial production fell for the first time in five years, putting on its worst performance in over six years, with anecdotal evidence suggesting falling new order volumes had led firms to cut output. Manufacturers' new order volumes fell at the sharpest pace for 74 months in February (since December 2001), with the reduction in new work linked to worsening domestic demand alongside greater competition from abroad. The survey also suggested that alongside the ongoing internal demand contraction which Spain is undergoing, the continuing strength of the euro against the dollar is contributing to weaker export demand. The forward-looking indicators in the survey continued in the same gloomy vein, with employment expectations falling for a sixth consecutive month, while purchasing plans fell at the sharpest pace since July 2003. Outstanding work work awaiting completion also contracted.

Services PMI

Activity in Spain's service sector fell to a record low in February as costs surged while business gave few signs of any kind of bounce back, according to the NTC Purchasing Managers Services Index (PMI) published last Wednesday. Though the headline PMI figure recovered to 46.1 from January's 44.2 (see the chart below), the figure was still well below the 50 mark which divides growth from contraction and was the second weakest reading in the survey's 8-1/2 year history.

"Clearly there's a lot of downward pressure on growth," Chris Williamson, Chief Economist at NTC Research is quoted as saying. He added that the survey's forward-looking indicators emphasised the risks of a sharp slowdown in Spain after a long economic boom. A measure of confidence in the business outlook slipped to 59.2 from 59.8 in January (achieving in the process a fall of 14.2 points in a year and a new low for the survey) with respondents stressing their apprehension in the face of increasing economic uncertainty.

The new business index recovered somewhat to 45.9 from 43.5 but showed demand still falling. As firms continued to work their way through backlogs of business, employment showed the most marginal growth in 4-1/2 years.

Italy's service sector contracted in February at its fastest pace for more than a decade, as new orders languished and outstanding business fell away sharply, according to NTC/ADACI Services PMI. The 47.2 reading was well below the 50 mark separating expansion from contraction, and marked the third consecutive month of declining activity and the worst reading in the survey's 10-year history.

"A record fall in business activity was underpinned by a lack of new orders, reflective of low levels of demand," according to the NTC report. Fewer new orders meant backlogs of work were cleared for the seventh consecutive month in growing evidence of spare capacity in the sector.

Growth in France's services sector rebounded in February as sustained demand boosted activity from the two-year low it had hit a month earlier, and the NTC/CDAF Services Index (PMI) rose to 58.2 in February from 56.6 in January, clocking up a 56th consecutive month above the 50 floor for growth and bringing the 2008 level near to 2007's 58.6 average.

A sub-index that tracks new business growth rose to 57.2 from 56.1 in January, well off levels above 60 hit in recent years but still driving a service sector boom that has outshone Germany, Italy and Spain, the other major euro zone economies. "The rate of growth remains quite impressive," said Chris Williamson, chief economist at NTC.

Even so, France has been hit by several weaker-than-expected economic reports in recent weeks, especially with regard to consumer spending which drives a large part of the service sector. French growth slowed in the fourth quarter of 2007 in step with the global economic downturn, while January consumer spending suffered its biggest drop in over a year and February consumer morale fell to its lowest in more than 20 years.

Purchasing managers were more worried in February than in previous months, the survey showed. Its business expectations index fell to its lowest level in six months. "Because demand does seem to be more resilient in France among consumers, we've got more inflationary pressures," said NTC's Williamson. "The PMI's price indexes are still at worrying levels."

German services Purchasing Managers' Index rose to 52.2 in February from 49.2 in January, and the index reading was the highest for three months. Tim Moore, economist at NTC Economics said “German service sector activity expanded at a below-trend pace in February, despite service providers registering an improvement in new business volumes for the first time in three months.”