Monday, June 30, 2008

Italy Consumer Price Inflation June 2008

Italy's inflation rate was up agin in June to the highest in over 11 years as food and energy costs continued to rise. Consumer prices calculated using the European Union Harmonised methodology were up 4 percent from a year earlier, the most since the index was created in January 1997, and up from 3.7 percent last month, accodring to the national statistics office (ISTAT) today. Consumer prices in Italy rose 0.5 percent in June from the previous month,

Consumer prices are rising all across Europe even as economic growth slows. Oil prices have almost doubled in the past year and are near a record high today. European Central Bank President Jean-Claude Trichet and his team at the ECB will probably raise the bank's benchmark interest rates this week by a quarter-point to 4.25 percent. This will mean that economic activity in Italy will be under pressure from rising interest rates, fiscal spending reductions and the high euro all at the same time, and at the very moment when the Italian economy is showing considerable weakness.

At the same time Italian producer prices rose to their highest in at least eight years in May to 7.5 percent, according to additional data from the statistics office today. Energy costs for manufacturers are 21.5 percent over the last year, according to the report.

EU Confidence Indicator

Confidence among European executives and consumers dropped again in June as inflation accelerated and the European Central Bank signaled it may increase interest rates to a seven-year high.

The index measuring sentiment in the euro area fell to 94.9, the lowest level since May 2005, from 97.6 the previous month. Europe's manufacturing, services and retail industries have all shrunk this month as the euro's increase reduced export competitiveness and soaring food and energy prices undermined purchasing power. Oil reached a record above $143 a barrel today. Even as economic growth eases, ECB President Jean-Claude Trichet has said the bank may raise the benchmark rate on Thursday by a quarter point to 4.25 percent to tame inflation.

The sub index of confidence among manufacturers across the 15 nation eurozone fell to minus 5 in June from minus 2 in May, while consumer sentiment dropped to minus 17 from minus 15, according to today's report. Confidence in the construction and retail industries also declined.

The euro has increased 17 percent against the dollar in the last 12 months. A measure of companies' selling-price expectations rose to 16 in June from 13 in May, which compares with an average reading of 6 over the last 18 years, according to the commission report. Consumers also expect prices to rise more sharply than they did last month.

Separate figures released last Friday showed France's economy expanded less than initially estimated in the first quarter as household spending, the driving force of growth, stagnated.

Recent data show few signs that the situation is going to get any better. The June purchasing managers index for the eurozone fell in June, dropping further below the 50-point level that signals contraction. In the services industry, new business also declined this month.

Sunday, June 29, 2008

Italy Retail Sales April 2008 and June PMI

Italian retail sales were stationary in April on March in seasonally adjusted current price terms (ie without allowing for inflation) according to the latest data from ISTAT, and were down 2.3% year on year. When allowing for inflation (3.6% in March) they were down a total of 5.9% in real terms.

And by June the situation had deteriorated even further according to the latest Purchasing Managers Index (PMI) reading. Italian retail sales declined for the 16th consecutive month as rising oil and food costs eroded consumers' disposable income, the Bloomberg purchasing managers index showed. The seasonally adjusted retail sales index fell to 36.3 from 38.8 in May. The index is based on a survey of 440 executives compiled for Bloomberg LP by Markit Economics. A reading below 50 indicates a contraction.

Obviously the continuing inflation and negative consumer sentiment are affecting sales. Italian consumer confidence fell more than economists expected in June to near a two-year low, because of rising prices, according to a June 24 report.

More than 55 percent of the Italian retailers surveyed said they missed their June sales target, and profit margins tightened as they tried to lure customers with discounts. About 38 percent reported paying higher wholesale prices for the goods, they sell, according to the report.

The decline in Italy was mirrored by falling sales in France and Germany, pushing down the European retail sales index to 44 from 53.1. That was the second-biggest drop in the survey's four 1/2-year history.

Friday, June 27, 2008

Eurozone Retail PMI June 2008

European retail sales dropped sharply in June as rising fuel and food prices hit consumers' budgets, prompting stores to cut employment and become more pessimistic about future prospects, according to the latest readings on the Bloomberg purchasing managers index. The measure of sales activity in the euro region declined to 44 from 53.1 in May. A reading below 50 indicates contraction. The reading is the second- lowest registered by the index since its introduction in January 2004. Sales also fell from a year earlier.

Sales fell in Germany, France and Italy - the largest economies in the eurozone - led by Italy, where retail spending dropped again sharply. A measure of employment in the euro region fell to 48.6 in June from 49.9 in May, the report showed, staying below 50 for a third month.

The PMI provides data one month ahead of government issued figures and the steep drop to well below the 50.0 no-change level indicates that European retail sales fell-off sharply at the end of Q2.

Data have been volatile in recent months, in part reflecting strong swings in sales of clothing & footwear, food & drink and seasonal household goods due to a combination of weather conditions and the timing of Easter and Whitsun. However, a guide to the underlying weakness in the retail sector is provided by the average of the PMI data for Q2 (46.3), which signaled the greatest decline over any quarter covered by the survey to date (since Q1 2004).

Sales fell in all three of the largest euro countries in June.

Italian sales showed by far the strongest rate of decline of the three countries and have underperformed the Eurozone average throughout the first half of 2008 by a wide margin. The month-on-month sales index fell from 38.8 in May to 36.3, signaling the second-steepest decline in the survey's history. Falling sales were linked to low consumer confidence and reduced spending power due to the economic slump and high fuel and food prices.

German sales also fell markedly, a reverse from the sharp rise posted in May. The index slumped from May's eighteen-month peak of 56.6 to 44.9.

French retail sales showed the slowest rate of decline among the three countries covered, but this was still in marked contrast to the substantial increase recorded in May. The index fell sharply from May's twenty-three month high of 59.6 to 48.7.

Eurozone retail sales also fell sharply on a year-on-year basis in June, posting the second-steepest fall in the past twenty-seven months and representing a marked contrast to the thirteen-month peak in growth seen in May. The year-on-year sales index dropped from 56.1 to 43.6. On average, year-on-year sales over Q2 as a whole showed the steepest fall for three years. Lower sales than a year ago were seen in all three countries in June, led by a particularly sharp fall in Italy. This was tempered by a fairly marginal decline in Germany.

Sales by sector

Food & drink retailers again reported the strongest year-on-year increase in sales revenues, following May's record rise, largely reflecting higher prices. The other sector to see any growth in sales was pharmaceuticals, which saw a very marginal increase. Sales of clothing & footwear, household goods and autos & fuel all fell well below levels of a year ago, with the latter seeing the sharpest decline.

The rate of increase in prices paid for goods by retailers eased slightly from May's recent peak in June, but nevertheless posted one of the strongest monthly rises seen over the survey history. The prices index fell from 68.3 to 67.1, remaining well above the 50.0 no-change level. Germany saw the strongest rate of inflation, which hit a nine-month high and was the second-sharpest rise indicated ever in the survey history. Meanwhile, purchase price inflation eased in both Italy and France with the latter seeing the weakest rise of all three countries as the rate slowed to a nine-month low.

Purchase prices rose in all sectors except clothing & footwear, where a slight decline was recorded as suppliers offered discounts to stimulate sales. Inflation softened for all other product categories but remained relatively steep, especially for food & drink and household goods.

Retailers' margins showed the second-largest deterioration in the survey history in June, linked again in many cases to rising wholesale costs. The margins index fell from 43.0 to 39.9. Italian retailers continued to report by far the sharpest deterioration in margins, although profit margins were also squeezed in both France and Germany.

Sales targets were missed to a striking degree in June. The index of actual sales relative to planned sales fell sharply from 45.2 in May to 35.1. Italy saw the greatest shortfall against targets for the eighth straight month, followed by France and then Germany. By sector across all countries, targets were missed for all sales categories, though the shortfall for food & drink was marginal. Targets were again missed to the greatest extent in the autos & fuel sector, followed closely by clothing & footwear and household goods.

Retailers' optimism about beating targets in the coming month moderated in June. The expectations index eased down from 56.9 to 52.4. French retailers were again by far the most confident about beating targets while, in Italy, expectations were for targets to be exceeded by a narrow margin. In contrast, German retailers expect to miss targets for the first time in five months. Sales are expected to beat targets across all product sectors in June except household goods. By far the greatest optimism was again seen in the food & drink sector.

The employment index fell from 49.9 to 48.6 in June, signaling a drop in staffing levels at Eurozone retailers for the third successive month and the largest monthly decline since February 2006. Headcounts were cut due to concerns over the fragility of demand in coming months and the need to reduce costs in the face of rising wholesale prices. Retail employment fell for the sixth month running in Italy, the first time in six months in France and for the first time in two months in Germany.

The amount of goods purchased for resale by Eurozone retailers fell marginally in June as companies sought to keep stock levels to a minimum as a result of cost considerations. The index of purchases dropped from 50.7 to 49.8. Higher levels of purchasing in France and Germany were countered by a marked decline in Italy. Across the Eurozone, the level of unsold retail stock continued to rise despite the overall fall in purchases. The stocks index registered 54.5, down from 55.6 in May. Similar rates of growth were indicated across all three countries, with Germany slightly higher.

Thursday, June 26, 2008

Employment and Unemployment in Italy Q1 2008

Italy's unemployment rate rose slightly in the first quarter of 2008, reaching its highest level in over a year, adding to concern that the slowdown in the eurozone's tird biggest economy is deepening. The jobless rate increased to 6.5 percent from a revised 6.2 percent the previous quarter. This was the highest level since the third quarter of 2006.

It is generally anticipated that Italy will expand at the slowest rate of any euro-region country this year, and Confindustria yesterday cut its 2008 growth forecast to 0.1 percent, a third of last year's rate, as rising food and energy prices and the euro's gain against the dollar put pressure on both consumers and exporters.

There were 16,000 job losses in construction and 11,000 in manufacturing from the last quarter of 2007. The total number of unemployed increased by 205,000 from the same period a year earlier, the first annual increase in five years.

Italian unemployment has steadily declined from a peak of 11.4 percent in 1998, after labor laws were loosened the following year and legal immigrants swelled employment in construction and agriculture. The changes 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.

There are signs that the flow of migrant workers into Italy may be ebbing on the back of the slowdown. The number of non-Italians employed dropped to 1,519,000 from 1,584,000 in Q4 2007. This was the second consecutive quarter that migrant employment has dropped.

The Q1 data illustrates the shift toward more precarious work. While the total number of those employed was up by 1.4% year on year (at 23.17 million) the composition of those employed shifted. The number of full time workers was almost stationary at 19.87 million (up just 50,000, or 0.25%). Workers with temporary contracts working full-time, however, were 0.7 percent from a year earlier, while the number of part-timers with on temporary contracts jumped 11.2 percent from the first quarter of last year.

There were 3.3 million part time workers in Italy in Q1 2008, up 300,000 (or around 10%) on Q1 2007.

While the number of part-time workers has steadily increased, those working on temporary contracts has been in decline since last summer, and reached 2.189 million in Q1, only 63,000 above the 2.126 million of Q1 2007.

Regional disparities in unemployment also persist. The jobless rate in Italy's industrial north was 3.7 percent in the first quarter, compared with 11.8 percent in the south of the country.

Producer Prices Continue to Maintain Pressure on the Spanish CPI

According to the National Statistics Institute (INE), Spain's Producer Price Index registered a year on year increase of 7.9% in May 2008. The activities that most influenced this increase were the manufacture of coke and refined petroleum products (39.9%) and food and beverage products (10.3%). In terms of the final destination of the goods, the variation rates as compared with the same month the previous year were 5.3% for consumer goods (3.3% for durable consumer goods and 5.6% for non-durable consumer goods), 2.0% for capital goods, 5.9% for intermediate goods and 21.2% for energy.

Month on month the index registered a 1.2% increase with respect to the month of April 2008.

Now if we look at Producer Prices and Consumer Prices compared (chart below) we will observe how the producer price index suddenly shot up as of the middle of 2007, dragging the consumer price index (red line) in its wake. At the moment the rate of increase in producer prices is still on a very strong upward trajectory, which gives little confidence that producer prices are going to start to slow their rate of increase substantially any time soon, which means we may expect continuing pressure on the CPI, and hence continuing pressure on the ECB to raise interest rates.

Now to get some idea of what is actually happening here, maybe a comparision with the German PPI might be useful. Germany is, after all experiencing more or less the same energy and food price shock as Spain. So why is the German rate of PPI increase so significantly below the Spanish one (see chart below)? It wouldn't seem to make sense would it?

Well is we look at the comparative charts for nominal hourly labour costs we can soon see at least one significant part of where the problem is. After mid 2007 the paths of the two lines diverge (see chart below) with Spanish labour costs shooting up while the German ones trend down. And this remember while the German economy continued with a more or less healthy rate of expansion, while the Spanish one started to head towards negative growth. Why did Spanish wages shoot up in this way? Answering that question would probably get us a significant part of the way down the road to understanding why Spain, in addition to all the other macro issues facing it, also has th¡s really complicated and complicating cost inflation problem.

Spanish Housing Crisis Update (1)

According to the most recent data from the Spanish Ministry of Housing house sales fell 30 per cent year on year in the first quarter. On the other hand the Finance Ministry have revealed that the budget surplus was down to €2.72bn at the end of May from €13.6bn a year ago. Buying by non-residents, which previously helped fuel Spain’s 10-year construction boom, also fell in the first quarter, by 26 per cent year on year, and by nearly 50 per cent from the previous quarter.

According to a recent article in El Periodico - "The British Fall Out of Love with Spain" - “The British are starting to sweat in Spain, and not because of the heat....Mortgages payments for their properties on the Mediterranean coast have shot up...and the numbers no longer add up. Some are returning the keys to the bank, others are being evicted, and many are abandoning the dream of living in villas and apartments in Andalucia”.

The appreciation of the Euro against the pound (15% in the last 9 months), and the rise in the one year euribor means that mortgage payments for Britons with mortgages in Spain are now 25% higher than they were in August last year.

The web portal are reporting that average asking prices for resale properties in Spain’s biggest cities fell by between 2% and 4% in the second quarter of the year over the previous quarter. We should note that these are asking and not selling prices. Selling prices are undoubtedly down rather more, although this is all really early days at this point. The cululative drop over the next 3 to 5 years is obviously going to be much larger, and the only real question is whether prices fall in one foul swoop, or drift steadily downwards.

Also El Pais reported this week that the Spanish banking sector needs to raise 62 billion Euros before the end of the year just to rollover the accumulated cedulas debt due 2008. This is no mean sum, and as the Spanish banking association says the liquidity crunch is a much more serious problem than the rising rate of mortgage delinquencies at this point in time. Up to then end of May the banks had raised some 20 billion euros, with 17 billlion of that coming from May alone. Just how much they are having to pay for this funding is not clear however, and over half the 20 billion has come from the Spanish banks buying their own cedulas.

El Pais scratches its head and asks just how the Spanish banks are going to "refinance" all the money which is coming due if the wholesale money markets remain closed to them. One interesting option they speculate on is offering better returns to lenders. But this would obviously mean Spanish banks and savings banks would need to raise the interest rates they charge their own clients. I find it interesting that people are already begining to speculate about the need for people to pay higher interest rates on their mortgages (remember we are talking about refunding the existing mortgages here, not new finance), since personally I imagine this is going to be an important ingredient in any longer term "rescue package". But redefining en-masse existing mortgage contracts would presumeably need legislation (I am no expert on Spanish law), and would obviously be far from popular with voters. But then, precious little of what the Spanish government is going to be forced to do from here on in is likely to be popular with voters.

Wealth Effect

According to the latest estimate from the Bank of Spain, for every 10,000 Euros fall in property prices, there is a corresponding fall in average household spending of 300 Euros per year. When the head of the household is in the 35 to 44 years bracket, the fall in spending is 600 Euros per year.

This is basically the well known transmission effect from property prices to private consumption known as the "wealth effect". Properties are the main form of collateral for household borrowing, so falling property prices reduce the ability of households to borrow and spend. The Bank estimates that for every 1% fall in property prices, household consumption is liable to fall by over 0.1%.

Land Prices

One of the big problems here in Spain is likely to revolve about what happens to the price of land. According to the latest data from the Ministry of Housing, land for building fell to 251 Euros/m2 in March, a 7.7% drop when compared with March 2007. Land prices have now fallen for 3 consecutive months, and at least as far as the official statistics are concerned, are currently falling faster than house prices. The average cost of land in Spain is now back to where it was at the end of 2004. Along with falling prices, the market for land has also been shrinking. Thn number of land transactions in the first quarter of the year was down by 31% compared to Q1 2007.

Spanish borrowing at the ECB

Returning to the theme of borrowing by Spanish banks at the ECB for a moment, and that notorius €208 billion ($320 billion) of eligible securities which have been created by eurozone banks since last August largely (everything but 5.8 billion euros according to JP Morgan) for use at the ECB, I have been noting how the Spanish banks are not standing out especially for their use of this facility, and have mainly drawn according to the weight of their share in the eurozone itself. One explanation for this may be found in the most recent appearance of Bank of Spain governor, Miguel A. Fernandez Ordoñez, before the Economy and Taxation Commission of the Spanish Congress. There he stated (June 24, p9) that Spanish banks have increased their participation in eurosystem fundings, "without going far beyond the equivalent participation in the key of Bank of Spain in BCE´s capital".

Las entidades españolas mantenían así una liquidez razonable y una amplia diversificación de plazos y segmentos de financiación cuando los mercados mayoristas en los que venían captando una parte notable de sus recursos colapsaron. Su capacidad de respuesta en este entorno de dificultad ha quedado patente en la adaptación que han llevado a cabo de sus fuentes de financiación, pugnando por captar pasivos tradicionales, desplazándose hacia plazos más cortos y, en el tramo final del pasado ejercicio, elevando su recurso al Eurosistema, aunque a partir de un nivel limitado y sin alejarse de la participación equivalente a la “clave” del Banco de España en el capital del BCE.

The Spanish banks low (although increasing)share on the ECB's weekly funding auctions (around 10%) may well be some kind of explicit or implicit limitation imposed by the ECB authorities themselves. Perhaps the rule is not to go much beyond the key suscription of the BDE on the ECB capital (it is 7.55%). This is the "clave" referred to by Ordoñez in the paragraph I quote in Spanish above.

José Luis Rodríguez Zapatero is finally due to appear before the Spanish parliament next week to offer his account of what is happening. It will be interesting to see just what exactly he has to say.

A fuller analysis of the whole structural problem in Spain can be found in this post here.

Wednesday, June 25, 2008

Italy Q1 2008 GDP Detailed Results (Updated)

Well I've finally found the time to look through the detailed ISTAT data on Q1 2008. In the first place GDP was up by a seasonally adjusted 0.5% on the last quarter of 2007, and by 0.3% on Q1 2007.

Imports were down 0.5% on the quarter, while exports were up 1.4% As a result the balance between imports and exports changed, and this is undoubtedly one of the main factors in the "bounce back" in the first quarter from the 0.4% contraction registered in Q4 2007.

Total consumption was up q-o-q 0.2% (all data seasonally adjusted), but it is the composition here that matters, since private household consumption was only up 0.1% (after falling 0.4% q-o-q in Q4 2007) while government consumption and transfers were up 0.4% (that's a 1.6% annual rate in an economy that is hardly growing). It is hard to see how this rate of increase in government consumption can be maintained and the deficit be reduced at one and the same time.

Gross Fixed Capital Formation was down q-o-q 0.2%, of which equipment was stationary, transport equipment was down 3.4% and construction was up 0.3%.

However year on year machinery and equipment (ie investment and renewal) was down 0.9% following an annual 2.5% drop in the previous quarter. That's why all those business confidence readings are so important, since in many ways the bottom has all but fallen out of Italian investment in machinery and equipment over the last nine months, and to get this item moving again we are going to need to see a revival in confidence, something which is unlikely to appear over any immediate horizon.

Italian business confidence dropped to its lowest level in almost three years in June as slowing economic growth, rising energy costs and a stronger euro all weighed on orders. The Isae Institute's business confidence index dropped to 87.1 from a revised 89.4 in May. That is the lowest reading since July 2005.

So basically the Italian economy got what little growth it had in Q1 2008 from a rise in government spending and transfers and an improvement in the international trading position (better exports and imports down). Maintaining the former is inconsistent with the objective of reducing the fiscal deficit, and the latter will be hard to sustain in we are now entering a collective Eurozone slowdown. Investment is unlikely to pick up substantially until the mood and outlook change and consumer consumption is not going to change greatly in coming months, in particular with rising unemployment, and increasing costs of food and energy. So basically be prepared for a number of quarters which look, at best, pretty much like the two we have just been through.


I'm preparing a piece for RGE Europe EconMonitor for Monday, and I'm making some charts, so I thought a couple of them might be useful to accompany this post.

Here's the long term GDP growth chart.

The big question facing structural macro economic theory is, I think, to explain why the long term private consumption chart for Italy looks the way it does. The 1993 collapse isn't the problem. The question is why does it appear to go in waves, which each wave cycle running at a lower level. This is what I would agrue to be the population ageing factor. You know, the one that virtually everyone else suggests doesn't exist. But if this isn't about population ageing and life cycle dynamics then I find it hard to understand why we should be seeing such similar phenomenon from this point of view in the leading "agers": Germany, Italy and Japan.

Tuesday, June 24, 2008

Non Spanish Population Resident in Spain January 2008

The National Statistics Institute has just published the latest data from the Padron Municipal (valid as of 1 January 2008). 5,220,577 foreign born residents in Spain at that point. This was an increase of 701,023 over 1 January 2007. The evolution of the foreign born population can be seen in the chart below.

To give us some idea where we are here, Spain's population increased by 862,774 people during 2007. Natural increase in the Spanish population accounted for 161,751and the rest of the increase was a result of net inward migration.

Residents by country

Basically I would argue that the whole future evolution of the Spanish economy depends on what now happens to all these immigrants (who have basically compensated for the "missing births" in Spain which have been produced by the presence of lowest-low fertility for such a long time.

Here is a chart showing the principal migrant source countries outside of Western Europe. In Western Europe the UK is far and away the largest origin point, with 352,000 residents at the end of 2007. It is also interesting to note how the increase in the numbers of new residents from Western Europe has now slowed considerably. Now that the housing boom has fully burst it is unlikely the inflows from these sources will pick up very much in the near future.

Outside Western Europe the big news this year is that Romania has jumped into the number one slot, with 728,961 residents, overtaking the previous number one, Morocco (who now have 644,688 residents). The number of Ecuadorians actually dropped by 6,989 in 2007 and now stands at 427,099. It is hard to say anything conclusive about this, but at face value it does seem to suggest that the idea that East Europeans would be transient migrants and Latin Americans more permanent may be a large over-simplification. The Romanian community in Spain (as well as in Italy I suspect) seems now to be well established, and it may well be that many of these migrants have now decided to change their country permanently, we will see. If that is the case the implications of this (with 700,000 people largely of working age in Spain and a similar number in Italy) are enormous for the future of a country with a working population of only just over 10 million, and a population which due to its own low fertility would soon be contracting naturally. Unfortunately few people are thinking about this problem at this point.








Spain Companies Created and Dissolved April 2008

One of the data points we will be following on this blog as the Spanish crisis develops will be the rate of creation and destruction of companies. The INE have just published the data here.

During April 2008 10,884 new companies were created, 12.0% fewer than in April 2007. The capital subscribed in their constitution was over 466 million euros, 36.4% less than in April 2007. In turn, the average capital subscribed registered an interannual decrease of 27.7%.

However if we look at the longer term chart, we can see perhaps a tendency towards a decrease in the rate of company creation since Q1 2007, but there have been spikes and troughs before, and there are good reasons to think that this time it will be different, and that perhaps we will get to see rather a large and extended trough. To be continued as the months progress.

In April, a total of 3,841 mercantile companies increased their capital, 12.4% more than for the same month of 2007. The capital subscribed in the increases registered an interannual increase of 9.4% and surpassed 3,622 million euros. The average capital subscribed in these operations decreased 2.7%.

On the other hand the number of companies dissolved in April was 1,178, a drop of 32.8% as compared with the same month of 2007. Of these, 85.0% did so voluntarily, 8.6% due to mergers and the remaining 6.4% for other reasons. Again there is considerable volatility in this data, but looking at the chart the rate of dissolution does certainly seem to have picked up since the middle of 2006.

Germany's Economy May Shrink in Q2 2008

Germany's economy may shrink this quarter after expanding 1.5 percent between January and March according to Deputy Economy Minister Walther Otremba today.

Gross domestic product ``may even be negative'' in the three months through the end of June, Otremba told reporters in Berlin. Stagnation ``would be a good result.''

As we saw earlier this morning, German consumer confidence fell to 3.9 from a revised 4.7 in June, the lowest in more than two years.

Asked whether the euro's strength against the U.S. dollar is beneficial as it damps rising oil prices, Otremba said the single currency's gains ``are rather negative overall.'' Still, the euro's effect on oil costs are a ``positive side effect.''

And as may be remembered from the earlier data, the German economy started 2008 with what seemed on the surface to be considerable momentum since with GDP (on a price, seasonal and calendar adjustmented basis) rising by 1.5% in the first quarter over Q4 2007 (or an annualised 6%).

Economic growth in the first quarter was supported primarily by gross fixed capital formation, which continued to increase at a pretty rapid 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).

But the bottom line was that, when we come to look at the components of growth, 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 really at the end of the day it isn't really that surprising that some of this added "bonus" should now be clawed back in Q2, and especially when there is the impact of inflation on consumer purchasing to thing about.

The Federal Statistics Office will publish a report on second-quarter German growth on Aug. 14.

France Business Confidence and Housing Starts June 2008

French manufacturers confidence held at the weakest in more than two years in June and housing starts slumped in May, suggesting that growth in the euro-area's second-largest economy is faltering.

An index of sentiment among 4,000 manufacturers was unchanged at 102, according to Insee, the Paris-based national statistics office. In France, Insee's manufacturing confidence indexes for May and June were the weakest since December 2005.

Housing Sector

Housing starts dropped by 21.6 percent in the three months through May from a year earlier, while sales of new homes fell by nearly 28 percent in the first quarter to 26,700 units. If this pace continues it may well amount to a shock similar to the crisis at the beginning of the 1990s.

The root of the problem seems to be that lending organisations do not have confidence in the European Central Bank’s strategy for refinancing banks. The average fixed interest rate on 20-year loans has recently risen above 5.0 percent for the first time since 2003. As global financial conditions turned down dramatically with the US subprime home-loan crisis from last August it looked as if France would be spared a severe correction, since recent French practice, and the lessons of the property crisis in the 1990s - it was argued - meant that banks had maintained a high level of prudence in lending.

But now property experts are wondering openly, how far and for how long the market will go down, and they also expect to see a sharp fall in the number of estate agencies which mushroomed during the boom.

Signs of a marked cooling have been emerging for months, and on Friday the national statistics office INSEE said bluntly: “France, too, is now experiencing a real-estate market downturn.

Consumer Spending in May

On the other hand French consumer spending on manufactured goods increased more than economists expected in May as shoppers bought more cars and clothes. Such spending, which accounts for around 15 percent of the French economy, rose 2 percent from April, when it fell a revised 0.9 percent, according to data from Insee, the national statistics office. The May increase was the first in three months.

Germany GFK Consumer Confidence Index July 2008

GfK's index forward looking index for July 2008, which is based on a survey of about 2,000 people, declined to 3.9 from a revised 4.7 in June, according to the latest data released by the Nuremberg- based market-research company earlier this morning.

According to GFK spiraling energy costs and the threat of a further massive rise in the price of gas are increasingly dampening the consumer mood in Germany. Both economic and income expectations dropped for the second time in succession, and the same applies to the propensity to purchase. As a result, the consumer climate indicator for July is forecasting a value of 3.9 points after a revised 4.7 points in June. In light of an inflationary trend which seems to be establishing itself around the three percent mark, GfK has downgraded its previous 2008 forecast for private consumption in real terms from 1%, which was based on an anticipated rate of inflation of 2.5%, to 0.5%.

Economic Expectations

After losing almost 10 points in May the economic expectations indicator once again declined - by just under 6 points - and now stands at 7.5 points. However, this means that the indicator remains in the positive range, and is still above the long term average of 0 points. The crisis on the financial markets, which is evidently still far from over, the foreseeable cooling of the global economy, which is bound to hit the USA particularly badly, and fears concerning personal purchasing power are causing consumer optimism to wane. In addition, the continuing strength of the euro is likely to weaken the positive growth dynamic of exports.

Income Expectations

Continuing inflation is also making itself felt on income expectations. This indicator fell in June by over 3 points to its current value of 7.2 points. The last time the indicator was below this level was December 2006. The longer the rate of inflation in Germany remains stuck around the three percent mark, the greater the danger of an anticipated loss of purchasing power on the part of German households. Even the potentially positive effects on private income generated by the rising rate of employment may well be negated by ongoing fears concerning the rising cost of living and high energy prices.

Propensity To Buy

Falling income expectations are leading to a corresponding drop in consumer propensity to buy. After losing 16 points in May, this indicator is once more down - by over three points - and currently stands at -23.7 points, its lowest value since June 2005.

High energy prices and the threat of further drastic price rises, for example, for gas, are consolidating expectations of inflation, which, in turn, is dampening the enthusiasm of German consumers to make purchases. Consumers are assuming that they will have to pay more for energy in the future and that consequently, this money will no longer be available for other purchases.

Eurozone Flash PMIs June 2008

Eurozone Flash PMI - Purchasing Managers' Index: The RBS/Markit Flash Eurozone Composite Output Index, based on around 85% of normal monthly survey replies, fell from 51.1 in May to 49.5 in June, slipping below the 50.0 no-change level to signal a contraction of private sector output for the first time since July 2003. Although only slight, the decline was the largest since June 2003.

Similar sized, marginal, declines were recorded in both the manufacturing and service sectors, with each sector registering a contraction of output for the first time since mid-2003.

Moreover, in a sign that worse may be yet to come, expectations of business activity in 12 months' time in the service sector slumped to a 10-year survey record low in June.

Incoming new business fell for the second successive month, dropping at the fastest rate since June 2003 as declines were recorded in both manufacturing and services.

Input price inflationsurged higher in June, reversing the easing trend seen in the previous two months and driving the overall rate of cost inflation to the highest since October 2000. Raw material input prices in manufacturing rose at the fastest rate for 23 months, with the rate of increase picking up sharply in June, while service providers' costs (which include wages and salaries) rose at the steepest rate since September 2000.


Flash estimates from Markit Economics suggest that the German purchasing managers index for manufacturing fell to 52.3 in June from 53,6 in May.

The German services PMI also saw a decline, falling to 53.3 from May's 53.8 level.

So both German manufacturing and services are still expanding, albeit at a slwoer pace than previously.

While noting that output had diminished in both services and manufacturing, NTC Economics also highlighted the rising input and output costs due to rising oil and raw material prices.

"German private sector companies signalled that input cost inflation accelerated to a ninety-three month high during the latest survey period, underpinned by the effects of the recent spike in crude oil prices," the report said.

"Meanwhile, output prices at German private sector companies continued to rise robustly in June, with the rate of inflation the second-strongest since September 2000," it continued. "This was led by marked increases in prices charged by firms operating in the service economy."


The French economy may well be contracting in June. According to Markit Economics who released data on the purchasing managers indexes for manufacturing and services earlier today, both fell into contraction territory in June. According to the flash estimates, the manufacturing PMI fell to 49.2 - its lowest level in more than three years - after rising to 51.5 in May.

"The drop in output reflected a contraction of new orders for the second time in the past three months, with the principal weakness of demand centred on the domestic market as export orders fell only slightly," Markit said in a press release.

The services PMI for France also slipped to 49.2, after falling to 50.5 May. The services PMI is now at its lowest level since November 20

Services have obviously been contracting for several months now, at least according to this indicator.

Eurozone Inflation May 2008

Inflation in the euro zone accelerated to 3.7 percent in May, the highest rate recorded since the launch of the euro, and clearly adding to the arguments inside the ECB for an interest rate rise in July.


Inflation accelerated in May in Germany as the cost of oil hit ever higher levels. Consumer prices, according to the European Union harmonised methodology, was up by 3.1 percent year on year, according to data from the Federal Statistics Office. That's slightly above the initial estimate of 3 percent made on May 28. Month on month prices rose 0.7 percent.

Oil prices reached a record $139.12 a barrel last week and European Central Bank President Jean-Claude Trichet indicated that the ECB may raise its benchmark rate by a quarter-point to 4.25 percent next month to contain inflation.

German inflation has now exceeded the ECB's limit of a rate "close to but below 2 percent" for over a year and even the strong appreciation in the euro has failed to offset higher oil and food costs. While the euro rose 8 percent in trade-weighted terms over the past year, oil prices doubled.

The price of fuels rose as much as 12 percent from a year earlier. Diesel jumped 26 percent and the cost of light heating oil surged 57 percent in May, the statistics office said. Food prices rose 7.9 percent compared with May 2007.

ECB policy makers have been becoming increasingly concerned that inflation expectations are on the rise. Expectations, as measured by the so-called breakeven on five-year French inflation-indexed bonds, were at 2.4 percent today, up from 2.12 percent in March.

The ECB currently predicts inflation in the euro region will average about 3.4 percent this year and slow to 2.4 percent in 2009. Economic growth is forecast to slow to 1.8 percent in 2008.

So while economic growth is cooling in EU countries, the ECB remain focused on price stability, and investors now expect the ECB to lift its repo rate twice this year, taking it to 4.5 percent, according to Eonia forward contracts.

However, according to the latest data from the German statistical office wages were rising at a slower rate than inflation in the first quarter of 2008, since employers in the industry and service sectors paid a calendar-adjusted 1.7% more for one hour worked than in the same quarter a year earlier. The two main components of labour costs showed different trends: The increase in gross wages and salaries accelerated slightly to 2.3%. However, non-wage costs declined 0.1%, which had a downward effect. This trend reflected above all the change in the rate of employers’ contributions to the unemployment insurance scheme. As of 1 January 2008, the rate was reduced from 2.10% to 1.65%.


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.